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Rating Action:

Moody's affirms Hong Kong Mortgage Corporation at Aa2 with stable outlook

08 Feb 2018

Hong Kong, February 08, 2018 -- Moody's Investors Service, ("Moody's") has today affirmed The Hong Kong Mortgage Corporation Ltd.'s (HKMC) long-term foreign and local currency senior unsecured debt and issuer ratings at Aa2 and its short-term issuer rating at P-1. The company's senior unsecured and other short-term medium term note (MTN) program ratings are also affirmed at (P)Aa2 and (P)P-1.

The outlook on the company's ratings remains stable.

RATINGS RATIONALE

HKMC's long-term ratings are aligned with those of the Hong Kong government given its full government ownership and its public policy mandates, broad representation of government officials and legislators on its board of directors, and ongoing and expected extraordinary government support during times of stress.

The company carries out four main public policy mandates through its operations

- providing liquidity to the banking system through the purchase of mortgage loans

- promoting and facilitating home ownership

- developing the local debt capital markets

- developing retirement planning solutions

Moody's considers HKMC as a Government Related Issuer (GRI), and its Aa2 rating takes into account: 1) the company's baseline credit assessment of a2; 2) very high level of support from the Hong Kong government; and 3) high dependence (a measure of the correlation between the credit factors that would affect the Hong Kong government and those that would affect HKMC).

HKMC's baseline credit assessment of a2 takes into account its importance to the well-functioning of the mortgage market in Hong Kong, its conservative risk management, and its solid financial profile with strong capitalization, sound asset quality, conservative risk management, and good liquidity management. The rating also takes into consideration its wholesale-funded nature, the company's concentrated exposures to the housing market in Hong Kong, and the availability of a HKD30 billion credit facility from Hong Kong's Exchange Fund.

HKMC's loan exposures predominantly consist of residential mortgages in Hong Kong. The company's loan balance has steadily declined since end-2011 amid ample liquidity in the banking system. The company has maintained very good asset quality in its mortgage loan portfolio and mortgage insurance book since its establishment, and its impaired loan ratio is less than 0.1%.

The company's investment guidelines specifies minimum credit ratings for its debt securities investments. Its debt securities are rated single-A or above. The company also invests in government bond index funds in Hong Kong and Asia, and REITs in Hong Kong. Investment securities and bank placements comprise the bulk of its total assets.

HKMC has consistently maintained very strong capitalization. The company's total capital adequacy ratio at end-June 2017 was 20.7%, with capital consisting mostly of shareholders' equity. In the event the company's capital is eroded by operating losses or persistent strong growth, it has access to HKD1 billion of committed additional capital from the Exchange Fund.

HKMC generates sound profitability from its operations, although its net interest margin and operating efficiency have weakened as its loan balance declined. The company's return on assets was 0.9% in the first half 2017 after excluding gains on the disposal of available-for-sale securities, down from 1.1% in 2016.

As a wholesale-funded entity with no customer deposits, HKMC relies on ongoing access to the debt capital market to fund its operations. Nevertheless, the company has a policy of pre-funding its expected asset purchases and maintains a very strong liquidity profile during normal economic conditions. The company has good access to capital markets owing to its strong financial fundamentals and government affiliation, and has access to a HKD30 billion credit facility from Hong Kong's Exchange Fund in the event capital market conditions deteriorate.

Factors that could lead to an upgrade

HKMC's ratings could be upgraded if the Hong Kong government's rating is upgraded.

The company's BCA is high, taking into account its geographical and sector concentration, and is unlikely to be adjusted higher.

Factors that could lead to a downgrade

HKMC's ratings could be downgraded if the Hong Kong government's rating is downgraded.

The company's BCA could be lowered if (1) unexpected large losses on its mortgages and mortgage insurance book erode a significant portion of its capital, (2) the credit facility from the Exchange Fund is withdrawn, and (3) the company is instructed to carry out policy functions that weaken its financial profile. A decline in the company's capital adequacy ratio below 14% or an increase in impaired loans to 1.5% of total loans may trigger a review of the BCA.

PRINCIPAL METHODOLOGY

The methodologies used in these ratings were Finance Companies published in December 2016, and Government-Related Issuers published in August 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

The Hong Kong Mortgage Corporation Ltd., headquartered in Hong Kong, reported total assets of HKD49.5 billion at end-June 2017.

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.

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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