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Rating Action:

Moody's affirms Bank of East Asia Limited's ratings; outlook stable

04 Apr 2019

Hong Kong, April 04, 2019 -- Moody's Investors Service has affirmed Bank of East Asia, Limited's deposit ratings at A3/P-2. At the same time, Moody's has affirmed the bank's Baseline Credit Assessment (BCA) and Adjusted BCA at baa2, Counterparty Risk Assessments (CR Assessments) at A1(cr)/P-1(cr), Counterparty Risk Ratings (CRR) at A1/P-1, Senior Unsecured debt rating at A3, senior unsecured MTN program rating at (P)A3, Commercial Paper and Deposit note/CD program ratings at P-2, Subordinated rating at Baa3/Baa3(hyb), Subordinated MTN program rating at (P)Baa3, and PONV perpetual Additional Tier 1 capital securities rating at Ba2(hyb).

Moody's has also affirmed Bank of East Asia Ltd, Singapore Branch's Senior Unsecured MTN program rating at (P)A3, CR Assessment at A1(cr)/P-1(cr), and CRR at A1/P-1, as well as Innovate Holdings Limited's preferred shares rating at Ba3(hyb).

The outlook on Bank of East Asia's deposit and senior unsecured debt rating is stable, reflecting Moody's expectation that the bank will retain sound credit fundamentals despite moderating economic growth in Hong Kong and mainland China.

RATINGS RATIONALE

The affirmation of Bank of East Asia's baa2 BCA takes into account the bank's improving asset quality metrics and strengthened capitalization. It also takes into account moderating economic growth in mainland China, the bank's sizable mainland exposures, and the evolving nature of the bank's mainland lending book.

Bank of East Asia reported improving problem loan ratio in 2018, with impaired loans falling to 0.7% of gross loans at end-2018 from 1.1% at end-2017. The bank pared back corporate exposures in higher risk industries in the mainland and grew consumer lending and mortgages. In Hong Kong, the bank grew relatively low-risk residential mortgages by 28%, while in mainland China, the bank leveraged its partnership with technology firms to increase consumer lending.

The bank has higher mainland-related exposures compared with its Hong Kong peers. Loans to mainland-related customers accounted for 41% of total loans at end-2018. Although the problem loan ratio on the bank's mainland exposures has declined sequentially since 2017, moderating economic growth in the mainland and the unseasoned nature of the bank's mainland consumer lending portfolio nevertheless weigh on our assessment of the bank's credit profile.

Bank of East Asia reported Common Equity Tier 1 ratio of 15.7% at end-2018, up significantly from 13.2% at end-2017 as the bank implemented new corporate probability of default model with regulatory approval and grew lower risk-weighted assets such as residential mortgages. We expect the bank to retain sound capitalization, given a tightening in minimum regulatory capital requirements and as the bank maintains moderate balance-sheet growth. The bank has reported annual loan growth of below 6% since 2015.

Bank of East Asia's return on average assets was 0.8% in 2018, little changed from the prior year excluding profits from the sale of its Tricor business in 2017. The bank's profitability has recovered from its nadir in 2016 thanks to an improvement in its operating efficiency and a decline in credit costs. We expect the bank to report relatively stable profitability in 2019, with net interest margins widening modestly while credit costs remain steady.

Bank of East Asia has a liquid balance sheet. The bank is primarily funded by customer deposits, which accounted for 78% of its overall liabilities at end-2018. The bank has a greater reliance on corporate and structured deposits in mainland China than in Hong Kong because of its still modest retail branch network. The bank has ample cash, interbank placements and highly liquid securities to meet potential liquidity needs.

Bank of East Asia does not benefit from any affiliate support, and its Adjusted BCA is at the same level as its BCA at baa2.

— Deposit and senior unsecured ratings

Bank of East Asia is subject to Hong Kong's Financial Institutions (Resolution) Ordinance and Moody's considers Hong Kong an operational resolution regime.

The bank's deposit and senior unsecured ratings are positioned at A3, two notches above its Adjusted BCA. The bank's deposit and senior unsecured ratings benefit from one notch of uplift under Moody's Advanced Loss Given Failure (LGF) analysis, which reflects Moody's view of a low loss given failure for depositors and senior unsecured creditors in the event of non-viability. This takes into account the bank's sizable issuance of AT1 and Tier 2 capital securities, which are likely to absorb losses before the bank's junior deposit and senior unsecured creditors are likely to bear losses.

The deposit ratings also take into consideration Moody's assumption of a moderate probability of support from the Government of Hong Kong (Aa2 stable) in times of need, resulting in one further notch of rating uplift. The Hong Kong Monetary Authority designates Bank of East Asia as a domestic systemically important bank, subjecting the bank to more stringent capital requirement.

— CR Assessments and CRRs

Bank of East Asia's long-term CR Assessment of A1(cr) and long-term Counterparty Risk Ratings (CRR) of A1 take into consideration: (1) the baa2 Adjusted BCA; (2) Moody's Advanced LGF analysis, which positions the Preliminary Rating Assessment of the CR Assessment and CRRs three notches above the bank's Adjusted BCA, prior to the incorporation of government support, reflecting Moody's view of extremely low loss given failure, given the subordination of the bank's junior deposits, senior unsecured liabilities, and junior capital instruments; and (3) Moody's assumption of moderate government support, resulting in a one-notch further uplift in the bank's CR Assessment and CRR.

The CR Assessments and CRRs also factor in Moody's assumption of moderate likelihood of government support in times of need, resulting in one notch of rating uplift.

WHAT COULD CHANGE THE RATINGS UP

Bank of East Asia's BCA could be upgraded if (1) operating conditions in Hong Kong and mainland China improve; (2) the bank maintains good asset quality and effective risk controls; (3) the bank demonstrates consistently sound underwriting in its mainland lending; and (4) the bank maintains its strong capitalization with Common Equity Tier 1 ratio above 15%.

The bank's deposit and senior unsecured ratings could also be upgraded if the subordination of junior liabilities lead to very low loss given-failure.

WHAT COULD CHANGE THE RATINGS DOWN

The bank's BCA could be downgraded if (1) strong loan and asset growth outpaces capital generation, leading to Common Equity Tier 1 below 13%; (2) there is a material economic slowdown in Hong Kong and mainland China; or (3) there is a significant deterioration in the bank's asset quality metrics, with impaired loans rising above 1.5%.

The principal methodology used in these ratings was Banks published in August 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Headquartered in Hong Kong, Bank of East Asia Limited reported total assets of HKD839 billion at 31 December 2018.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Moody's considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody's. Unless noted in the Regulatory Disclosures as a Non-Participating Entity, the rated entites are participating and the rated entities or their agent(s) generally provide Moody's with information for the purposes of its ratings process. Please refer to www.moodys.com for the Regulatory Disclosures for each credit rating action under the ratings tab on the issuer/entity page and for details of Moody's Policy for Designating Non-Participating Rated Entities.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

The first name below is the lead rating analyst for this Credit Rating and the last name below is the person primarily responsible for approving this Credit Rating.

Sonny Hsu, CFA
VP - Senior Credit Officer
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
Client Service: 852 3551 3077

Minyan Liu
Associate Managing Director
Financial Institutions Group
JOURNALISTS: 852 3758 1350
Client Service: 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
Client Service: 852 3551 3077

No Related Data.
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