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Announcement:

Moody's: Key rating issues for PONV subdebt of Chinese banks and their Hong Kong subsidiaries

 The document has been translated in other languages

12 Nov 2013

Hong Kong, November 12, 2013 -- Moody's Investors Service expects to rate contractual non-viability or point of non-viability (PONV) subordinated debt of Mainland banks and their Hong Kong subsidiaries lower than these banks' plain vanilla subordinated debt to reflect the additional risks in these securities.

"Contractual non-viability subordinated debt gives regulators wider discretion and flexibility to impose losses on investors compared to 'plain vanilla' subordinated debt," says Sonny Hsu, a Moody's Vice President and Senior Analyst.

Hsu was speaking on Moody's recently released "FAQ on key credit issues regarding contractual non-viability subordinated debt issued by Chinese banks and their Hong Kong subsidiaries," which he co-authored.

All new issuances of non-common equity capital instruments in both Mainland China and Hong Kong must contain contractual non-viability language starting in 2013.

The Industrial and Commercial Bank of China (Asia) Limited (ICBC Asia) and China CITIC Bank International are the first two banks in Hong Kong and Mainland China to issue non-viability subordinated debt to international investors.

A unique feature of ICBC Asia's subordinated debt was that it contained non-viability triggers referencing both the bank and its parent, Industrial and Commercial Bank of China (ICBC).

"If either the Mainland Chinese or the Hong Kong regulators determine ICBC or ICBC Asia to be non-viable, bondholders will face full principal write-downs on the subordinated notes," says Hsu. Such features increase the risk for investors, as they are exposed to non-viability risks of both referenced entities.

In contrast, China CITIC Bank International's subordinated debt contains non-viability triggers that only reference the issuing bank, and allows partial write-down of principal.

Although contractual non-viability securities remain untested, Moody's expects them to become an integral part of the Chinese and Hong Kong regulators' toolkit when they resolve troubled banks in the future.

Moody's will apply the same approach for rating Chinese banks' contractual non-viability subordinated debt as that applicable to all other banks.

Most of Moody's-rated Chinese banks are partially owned by the government. An argument can be made that government support will be forthcoming in the future before regulators decide that these banks are non-viable.

However, Basel III has made it clear that regulatory capital needs to absorb losses either contractually or through regulatory "bail in" of subordinated securities.

The Chinese authorities have not made any affirmative statements that they will support contractual non-viability subordinated debt investors in the future. Moody's discussions with Chinese regulators suggest that regulators intend for such securities to be loss absorbing.

The ratings for contractual non-viability securities are generally linked to an issuer's Adjusted baseline credit assessment (Adjusted BCA), which reflect Moody's opinion of a bank's intrinsic financial strength, adjusted to incorporate parental support.

The Adjusted BCA is Moody's assessment of the likelihood that a bank, as supported by its parent, will either default or require extraordinary systemic support.

As such, the Adjusted BCA should be a good proxy to determine the point of non-viability for a bank. This is covered in detail in Moody's Global Bank Rating Methodology, published on 31 May 2013.

Potential losses resulting from a non-viability event will vary depending on the terms and conditions of each particular security.

In general, securities with partial principal write-down features and those allowing conversion to equity will experience lower loss severities compared to those requiring full principal write-downs.

Moody's will notch the ratings of contractual non-viability securities from issuing banks' Adjusted BCAs based on the specific features of each security, and their impact on the timing of a possible default and potential loss severity.

For subordinated debt with full principal write-down provisions, Moody's will position their ratings a further notch below the ratings of subordinated debt with partial principal write-down provisions.

Subscribers can access the report at: https://www.moodys.com/research/FAQ-on-key-credit-issues-regarding-contractual-non-viability-subordinated--PBC_159183

NOTE TO JOURNALISTS ONLY: For more information, please call one of our global press information hotlines: London +44-20-7772-5456, New York +1-212-553-0376, Tokyo +813-5408-4110, Hong Kong +852-3758-1350, Sydney +61-2-9270-8141, Mexico City 001-888-779-5833, São Paulo 0800-891-2518, or Buenos Aires 0800-666-3506. You can also email us at mediarelations@moodys.com or visit our web site at www.moodys.com.

Sonny Hsu, CFA
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Stephen Long
MD - Financial Institutions
Financial Institutions Group
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Moody's: Key rating issues for PONV subdebt of Chinese banks and their Hong Kong subsidiaries
No Related Data.
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