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Rating Action:

Moody's changes ratings outlook on BEA to stable from negative

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 & Ratings tab.

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

Hong Kong
Leo Wah, CFA
Vice President - Senior Analyst
Financial Institutions Group
Moody's Asia Pacific Ltd.
JOURNALISTS: (852) 3758-1350
SUBSCRIBERS: (852) 3551-3077

Hong Kong
YoungIl Choi
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
No Related Data.
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