Hong Kong, June 02, 2016 -- Moody's Investors Service has downgraded Nanyang Commercial Bank,
Ltd.'s long-term and short-term deposit ratings
to A3/Prime-2 from A1/Prime-1.
At the same time, Moody's has lowered the bank's standalone
baseline credit assessment (BCA) to baa2 from baa1, adjusted BCA
to baa2 from a2, and long-term counterparty risk assessments
(CR Assessments) to A2(cr). P-1(cr) short-term CR
assessment is confirmed.
These rating actions conclude Moody's review for downgrade initiated
on 28 August 2015, after China Cinda Asset Management Co.,
Ltd. (Cinda) (A3 negative) announced that it would acquire all
the issued shares of Nanyang Commercial Bank from Bank of China (Hong
Kong) Limited (BOC (Hong Kong)) (deposit Aa3 negative, BCA a2).
The outlook on all the ratings above remains negative.
RATINGS RATIONALE
The downgrade of Nanyang Commercial Bank's ratings mainly reflects:
1) Moody's expectation that the bank will grow more aggressively
its onshore Mainland lending, which will lead to a material increase
in the bank's risk profile; 2) the uncertainties related to
the bank's transformation of its business model and the execution
risks during the integration process; as well as 3) less support
uplift being incorporated in the ratings , given its change in ownership.
Nanyang Commercial Bank's long-term deposit rating of A3
combines its lower BCA of baa2 and a two-notch uplift based on
Moody's assessment that the bank will receive support from the Chinese
government (Aa3 negative) in times of need.
Moody's says there is a very high likelihood that the bank will
receive indirect support from the Chinese government through its new parent,
Cinda, given Cinda's majority ownership by the government
and strategic importance as one of the biggest distressed asset management
companies in China. However, Cinda has a lower rating than
Bank of China (Hong Kong) so the change of owner has resulted in less
support being incorporated in Nanyang Commercial Bank's ratings.
The lowering of the bank's BCA reflects Moody's concern that
the acquisition by Cinda will lead to a weakening of the bank's
standalone credit profile. Specifically, the benefits of
the change in ownership—namely, the enhanced business development
opportunities for the bank through access to Cinda's wider network
and customer base—are tempered by asset quality pressure.
This is a result of Nanyang Commercial Bank's expected further expansion
into Mainland China and the risk of the bank's taking on of riskier
loans. Since Cinda's core business is that of distressed
asset management, the customer referrals to Nanyang Commercial Bank
will likely to be skewed towards borrowers coming out of debt restructuring.
In addition, Nanyang Commercial Bank's previously strong capital
buffer will likely weaken to support anticipated rapid balance sheet growth,
although the risk is partially mitigated by stringent regulatory requirements
set by the Hong Kong Monetary Authority. The bank also holds large
amounts of liquid assets which can be used to support future business
growth.
The uncertainties associated with the change in operations and strategies
and execution risk during the integration process present additional challenges.
Nanyang Commercial Bank used to rely on BOC (Hong Kong) for back-office
support, including IT and other assistance. Such a collaboration
contributed to its good cost efficiency. But post acquisition by
Cinda, Nanyang Commercial Bank's cost-to-income
ratio will likely increase, due to the expansion of its network,
as well as investments required in IT and human resources.
The bank's deposit ratings carry a negative outlook, mirroring
the negative outlook on Cinda's ratings and China sovereign rating.
What Could Change the Rating -- Up
Nanyang Commercial Bank's deposit ratings are unlikely to be upgraded
in the near term, given the negative outlook.
However, the outlook could return to stable if: 1) China's
sovereign rating outlook returns to stable; or 2) Cinda's ratings
outlook returns to stable.
What Could Change the Rating -- Down
The bank's deposit ratings could be downgraded if Moody's
assesses that the China government's ability or likelihood to support
the bank is weaker.
Its BCA could experience downward pressure result from: 1) a substantial
decrease in its core capital associated with strong asset growth and higher
than expected credit costs; 2) a significant deterioration in the
bank's asset quality metrics; and/or 3) difficulties arising
from the integration process especially with regards to risk management
changes and cost control.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Banks published in
January 2016. Please see the Ratings Methodologies page on www.moodys.com
for a copy of this methodology.
Nanyang Commercial Bank, Ltd. is headquartered in Hong Kong
and reported total assets of HKD305 billion at end-2015.
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.
Sherry Zhang
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
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 downgrades Nanyang Commercial Bank to A3 from A1; outlook remains negative