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Rating Action:

Moody's affirms the A3 ratings of three China, Hong Kong banks; downgrades their short-term ratings to P-2 from P-1

 The document has been translated in other languages

31 Jan 2013

Hong Kong, January 31, 2013 -- Moody's Investors Service has affirmed the A3 long-term deposit ratings of China's Bank of Communications (BoCom), and Hong Kong's Dah Sing Bank Limited and Public Bank (Hong Kong) Limited.

At the same time, Moody's has downgraded their short-term deposit ratings to P-2 from P-1.

Moody's has also affirmed Dah Sing Bank's A3 senior, Baa1 subordinated, and Baa2 (hyb) junior subordinated debt ratings, as well as the (P)A3 senior, (P)Baa1 subordinated, and (P)Baa2 junior subordinated ratings on notes under Dah Sing Bank's Euro MTN program.

The ratings outlook for all three banks is stable.

A list of ratings following today's actions can be found near the end of the press release.

Today's affirmation of these long-term deposit ratings reflects Moody's view that these three banks continue to feature the credit characteristics of firms rated A3, whereas the downgrade of their short-term ratings reflects Moody's observations of the transition risks of short-term ratings that A3 banks represent over time.

RATINGS RATIONALE

Key determinant for assigning a short-term rating is an issuer's long-term risk of default

Moody's believes that, other things being broadly equal, lower long-term ratings imply not only increased default risk for long-term obligations but also increased default risk for short-term obligations. This view is based on Moody's assessment of current credit conditions and experience of multi-notch rating transition across an array of issuers rated A3 or lower during the global financial crisis.

Issuers with long-term ratings between A3 and Baa2 almost always map to P-2 under Moody's standard mapping for long-term ratings to short-term ratings. Deviations from this standard are intended to be exceptional; for instance when the combination A3/P-1 is meant to signal an unusually high expectation that the issuer's long-term rating will migrate upwards.

In the case of BoCom, Dah Sing Bank, and Public Bank (HK), Moody's believes that conditions that would warrant the banks retaining P-1 ratings while their long-term ratings remain at the A3 level are not present.

The affirmation of BoCom's long-term rating with a stable outlook reflects Moody's assessment that the bank's performance, especially in terms of asset quality and capital, will prove resilient in the current challenging operating environment.

Moody's assumes that the systemic support for BoCom in times of stress is very high because the Chinese government (rated Aa3/positive) owns a 37.5% stake in the bank, and given its systemic importance to the economy as the fifth-largest bank in the country by assets, with a market share of 3.9% in deposits at end-September 2012.

BoCom's standalone bank financial strength rating (BFSR) of D+ maps to ba1 baseline credit assessment (BCA) on Moody's long-term scale. The ba1 BCA is conservatively positioned relative to its financial metrics, given Moody's concerns over its unseasoned risk and governance systems and credit portfolios. Moody's would consider upgrading the BCA in 2013 if: (1) there are growing signs of economic stabilization; and (2) BoCom can keep its financial performances close to current levels.

At end-September, BoCom's Tier-1 ratio was 11.58%, the highest among Moody's-rated Chinese banks, while its NPL ratio was low at 0.87%. The bank's profitability is healthy. It reported a return on average assets of 1.22% for the first nine months of 2012.

On the other hand, BoCom's BCA could decline if there is evidence that: (1) the recent vintages of loan originations will strain its financial strength more than Moody's has assumed; (2) its financial leverage increases significantly from current levels due to aggressive business growth; or (3) there is a reversal in the trend of improvements in risk management, controls and corporate governance.

Any indication that government support is anything other than extremely high would be negative for its deposit and debt ratings, although Moody's considers such a scenario as unlikely in the medium term.

The affirmation of Dah Sing Bank's long-term deposit rating takes into account the bank's sound asset quality and adequate capitalization and liquidity profile. These positive factors are partially offset by its relatively small franchise, high borrower concentration, exposures to small- and medium-sized enterprises (SMEs) in Hong Kong, and profitability that is below the average for its peers.

Dah Sing Bank has maintained good asset quality metrics since 2009, with impaired loan ratios consistently below 1%. The bank also maintains a satisfactory capital ratio, with its Tier 1 ratio around 10% since 2009. On the other hand, low market interest rates and intense competition have weighed on Dah Sing Bank's core profitability, and will continue to pressure its profitability in the near term.

Moody's does not incorporate any systemic support in Dah Sing Bank's rating, given its limited market share of less than 2% for system deposits. The bank's rating is unlikely to be upgraded in the near term, as the rating is already high relative to its size.

However, upward pressure could arise if the bank's profitability improves, with the return on average risk-weighted assets rising to 1.8% or above, or if its franchise and market position strengthen substantially.

Dah Sing Bank's rating could be downgraded if (1) there is a decline in its capital position due to strong asset growth, such that its Tier 1 ratio falls below 9.5%; or (2) its asset quality deteriorates to the extent that its impaired loan ratio exceeds 1.5%.

The affirmation of Public Bank (HK)'s rating reflects the bank's strong capitalization, good asset quality metrics, and strong support from its parent Public Bank Berhad (foreign currency deposit ratings: A3/P-2/stable; BFSR/BCA: C/a3/stable).

It also takes into account the bank's modest franchise, its weaker-than-peer liquidity profile, and its high proportion of potentially risky unsecured consumer-related lending and taxi financing.

Public Bank (HK) is one of the smallest banks in Hong Kong. Its unsecured consumer lending and taxi financing businesses account for more than a quarter of its total loan portfolio, and make it more vulnerable to adverse economic developments in Hong Kong, where its business is based. Still, both businesses also have high returns.

Moody's expects the bank's strong Tier 1 capitalization of 19.1% at end-1H 2012 to provide it with an ample buffer to absorb potential losses in the event of stress.

Moody's assesses the probability of parental support from Public Bank Berhad as very high. Due to Public Bank (HK)'s small market position with less than 1% share in deposits, Moody's does not incorporate any systemic support in its ratings.

The bank is unlikely to be upgraded unless it can materially increase its market position and improve its franchise without sacrificing its asset quality and increasing its risk appetite. On the other hand, the bank's ratings could be downgraded if there is material deterioration in asset quality, with impaired loans rising to 4% of gross loans.

A weakening in capitalization -- due to aggressive balance sheet expansion, or a large dividend payout, such that its Tier 1 capital adequacy ratio falls below 13% -- could also lead to a downgrade. Any reduction in parental support for Public Bank (HK) would also negatively affect its deposit rating.

The principal methodology used in these ratings was Moody's Consolidated Global Bank Rating Methodology published in June 2012. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Other Factors used in this rating are described in Moody's Global Short-Term Ratings published in October 2012.

Taking into account today's announcement, the ratings of the affected banks are as follow:

Bank of Communications:

- BFSR/BCA: D+/ba1

- Local currency and foreign currency long-term bank deposits: A3

- Local currency and foreign currency short-term bank deposits: P-2

Dah Sing Bank Limited:

- BFSR/BCA: C/a3

- Local currency and foreign currency long-term bank deposits: A3

- Local currency and foreign currency short-term bank deposits: P-2

- Foreign currency senior unsecured debt: A3

- Foreign currency senior unsecured MTN: (P)A3

- Foreign currency subordinated debt: Baa1

- Foreign currency subordinated MTN: (P)Baa1

- Foreign currency junior subordinated debt: Baa2 (hyb)

- Foreign currency junior subordinated MTN: (P)Baa2

Dah Sing MTN Financing Limited:

-BACKED local currency senior unsecured MTN: (P)A3

-BACKED local currency subordinated MTN: (P)Baa1

-BACKED local currency junior subordinated MTN: (P)Baa2

Dah Sing SAR Financing Limited:

-BACKED local currency subordinated MTN: (P)Baa1

-BACKED local currency junior subordinated MTN: (P)Baa2

Public Bank (Hong Kong) Limited:

- BFSR/BCA: C-/baa2

- Local currency and foreign currency long-term bank deposits: A3

- Local currency and foreign currency short-term bank deposits: P-2

Bank of Communications is headquartered in Shanghai. As of 30 September 2012, its assets totaled RMB4.36 trillion ($694.6 billion).

Dah Sing Bank and Public Bank (Hong Kong) are headquartered in Hong Kong. As of 30 June, 2012, Dah Sing's assets totaled HKD 149 billion ($19.2 billion), while those of Public Bank (HK) stood at HKD 36 billion ($4.6 billion)

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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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.

The below contact information is provided for information purposes only. Please see the ratings tab of the issuer page at www.moodys.com, for each of the ratings covered, Moody's disclosures on the lead analyst and the Moody's legal entity that has issued the ratings.

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.

Bin Hu
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

Sonny Hsu
VP - Senior Analyst
Financial Institutions Group
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 affirms the A3 ratings of three China, Hong Kong banks; downgrades their short-term ratings to P-2 from P-1
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