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Rating Action:

Moody's downgrades Nanyang Commercial Bank to A3 from A1; outlook remains negative

02 Jun 2016

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
No Related Data.
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