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02 Jun 2010
Hong Kong, June 02, 2010 -- Moody's Investors Service has today changed the outlook on the "C-"
bank financial strength rating ("BFSR"), the A2/P-1 long/short-term
foreign and local currency deposit ratings, A3 foreign currency
subordinated debt rating, and Baa3 foreign currency junior subordinated
debt rating of The Bank of East Asia ("BEA") to stable from negative.
Moody's has also changed the outlook on the Ba3 foreign currency
backed preference stock rating of BEA's 100%-owned
subsidiary, Innovate Holdings ("Innovate"), to
stable from negative.
"The change in BEA's ratings outlook to stable mainly reflects
BEA's investments to upgrade its risk management framework and internal
controls, resilience during the latest global financial crisis,
and the improved operating environment," says Leo Wah,
a Moody's VP/Senior Analyst.
Following a derivative valuation manipulation incident in the first half
of 2008 and a few other incidents that raised concerns over BEA's
internal controls and risk management, BEA has conducted a major
overhaul of its risk management. A new risk management division
was established in 2009, headed by the chief risk officer -
a newly-created position - who oversees the overall risk
exposure of BEA. Risk management is mainly consolidated at the
risk management division, with specialized risk management committees
responsible for different types of risks.
In view of the derivative valuation manipulation incident, the product
control department was set up in April 2009. It has independent
control functions on treasury and derivative activities, such as
risk models and price verification.
Moody's considers it encouraging that BEA is taking a determined
approach to revamping its risk management and will monitor the effectiveness
and the progress of its future risk management enhancements during the
next one to two years before considering an upgrade of its BFSR.
As with many other banks in Hong Kong, BEA saw its earnings recover
in 2009 and has managed to contain credit risks satisfactorily.
Its pre-provision profits exceeded the levels in 2006 and 2007,
although risk-adjusted profitability, defined as pre-provision
profits as a percentage of risk-weighted assets, was relatively
low at 1.63% in 2009.
BEA's asset quality held up well during this financial crisis.
Its impaired loan ratio was a mere 0.99% as of December
2009, up slightly from 0.69% a year ago. Total
new loan impairment charges were just 50 bps of loans in 2009, up
slightly from 34 bps a year ago. With the operating environment
improving, significant deterioration in asset quality is unlikely.
The transition to a new senior management team in mid-2009 has
so far been smooth. However, the possible retirement of its
Chairman and Chief Executive Dr. David Li, currently aging
71, in 2012 (his new three-year term started in 2009) raises
concerns over the uncertainty of the succession plan. Dr.
Li is considered to have been a key driver of BEA's franchise,
especially in China. Although BEA is primarily a Hong Kong bank,
its China operation has been expanding rapidly. Its distribution
network in China has 80 outlets, second among foreign banks.
For possible future rating actions, Moody's will in particular
examine 1) the future development and effectiveness of BEA's internal
control and risk management; 2) the possible retirement of Dr.
Li and the succession plan; and 3) BEA's profitability going
forward. Increases in risk-adjusted profitability to 2.5%
or above without any serious internal control lapses could lead to an
upgrade of the BFSR.
On the other hand, more internal control concerns and deterioration
in asset quality, with the impaired loan ratio exceeding 2%
and new impairment charges of more than 100 bps of loans per annum,
could be credit negative.
Moody's last rating action with regard to BEA was taken on February 10,
2010 when its junior subordinated debt rating was downgraded to Baa3 and
Innovate's backed preference stock rating was downgraded to Ba3.
The principal methodologies used in rating BEA were "Bank Financial Strength
Ratings: Global Methodology" (February 2007) and "Incorporation
of Joint-Default Analysis into Moody's Bank Ratings: A Refined
Methodology" (March 2007), which can be found at www.moodys.com
in the Rating Methodologies sub-directory under the Research &
Other methodologies and factors that may have been considered in the process
of rating this issuer can also be found in the Rating Methodologies sub-directory
on Moody's website.
BEA, headquartered in Hong Kong, reported total assets of
HK$434.1 billion (approximately US$56.0 billion)
as of the end of 2009.
Ratings are as follows (all carrying stable outlook):
Bank of East Asia
Bank Financial Strength C-
Long-Term Bank Deposits (Foreign and Domestic) A2
Long-Term Subordinate (Foreign) A3
Long-Term Junior Subordinate (Foreign) Baa3
Short-Term Bank Deposits (Foreign and Domestic) P-1
Innovate (100%-owned by BEA)
Backed Preference Stock (Foreign) Ba3
Leo Wah, CFA
Vice President - Senior Analyst
Financial Institutions Group
Moody's Asia Pacific Ltd.
JOURNALISTS: (852) 3758-1350
SUBSCRIBERS: (852) 3551-3077
Moody's changes ratings outlook on BEA to stable from negative
Vice President - Senior Analyst
Financial Institutions Group
Moody's Asia Pacific Ltd.
JOURNALISTS: (852) 3758-1350
SUBSCRIBERS: (852) 3551-3077
No Related Data.
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