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Rating Action:

Moody's reviews Hong Kong banks' ratings following the Banks methodology update

27 Apr 2018

Hong Kong, April 27, 2018 -- Moody's Investors Service has today announced multiple rating actions on Hong Kong banks following yesterday's publication of an update to its Banks rating methodology.

The rating actions affect all 18 rated Hong Kong-domiciled banks, their overseas branches and special purpose vehicles (SPVs).

Moody's has placed the following on review for upgrade:

- 9 banks' long-term deposit ratings

- 2 banks' short-term deposit ratings

- 5 banks' long-term senior unsecured ratings

- 1 banks' long-term issuer rating

- 1 banks' short-term commercial paper rating

- 13 banks' long-term counterparty risk assessment (CR Assessment)

- 3 banks' short-term CR Assessment

- 3 banks' point of non-viability (PONV) subordinated debt

At the same time, Moody's has affirmed nine banks' long-term deposit ratings, three banks' senior unsecured debt ratings, two banks' long term CD program ratings and one bank's issuer rating. Moody's has changed one bank's outlook to negative from stable.

Moody's has also affirmed eight banks' Basel II-compliant subordinated debt ratings, four banks' PONV subordinated debt ratings, five banks' preferred shares ratings, and five banks' long term CR Assessment.

In yesterday's updated Banks rating methodology, Moody's formally designated Hong Kong as an operational resolution regime jurisdiction. Going forward, Moody's will adopt the advanced loss given failure (LGF) framework to evaluate Hong Kong banks' liabilities, taking into account how the regulator will likely treat different creditors when a bank fails and enters resolution.

Moody's will also lower its expectation of Hong Kong government's likelihood of supporting Hong Kong banks in light of Hong Kong's revised resolution regime. However, the impact of lower likelihood of support on deposits and senior unsecured debt should be offset for many banks by a decline in expected losses under the new LGF framework, given the subordination of junior creditors under Hong Kong's going-concern resolution approach.

Please click on this link http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_199267 for the List of Affected Credit Ratings. This list is an integral part of this Press Release and identifies each affected issuer.

RATINGS RATIONALE

-- LONG TERM RATINGS AND CR ASSESSMENT

Moody's advanced LGF framework assesses the potential impact of a bank's failure on its various debt classes and deposits in the absence of any government support, taking into account the subordination of more junior liabilities and the volume of each class of liabilities. Moody's expects that Hong Kong's legislation will enable authorities to achieve orderly resolution of a failed bank. It also provides a reasonable degree of clarity on how the bank's failure could affect depositors and other creditors.

Under Moody's advanced LGF framework, the ratings of senior liabilities will benefit from the subordination of junior liabilities, as loss absorption by junior creditors reduces the extent of potential losses for senior creditors. Where appropriate, given expected regulatory requirement and public commitment of the rated banks, Moody's will take into account banks' expected issuance of loss absorbing capacity (LAC) debt instruments in the forward-looking advanced LGF analysis.

The combination of instrument volume and subordination should lead to expected loss under the LGF analysis sufficiently low to offset the diminished expectations of government support for many banks. Moody's currently incorporate Hong Kong government support uplift in five Hong Kong banks' ratings, with two banks benefiting from more than one notch of support uplift. As such, few Hong Kong banks will be affected by the expected decline in government support.

Among the four largest banks in Hong Kong, Moody's has placed the deposit ratings of The Hongkong and Shanghai Banking Corp. Ltd, Hang Seng Bank Limited, and Standard Chartered Bank (HK) Limited on review for upgrade. These banks are all important subsidiaries of non-emerging market global systemically important banks (G-SIBs), and are expected to need to meet specific LAC requirement.

Moody's has changed the outlook on Bank of China (Hong Kong) Limited's deposits to negative from stable. The negative outlook takes into account potential reduction in future government support, and uncertainty regarding the timing and quantum of the bank's future LAC issuance.

Moody's has placed the majority of the mid-sized Hong Kong banks' deposit and senior unsecured ratings on review for upgrade. The majority of the rated mid-sized banks have substantial issuances of outstanding preferred shares and subordinated debt. The subordination of the junior creditors in future resolutions should limit the extent of losses for depositors and senior unsecured creditors in future resolution. On the other hand, most of these banks' deposit and senior unsecured ratings do not factor in support from the Hong Kong government, and therefore not impacted by lower likelihood of future Hong Kong government support for banks.

-- SUBORDINATED DEBT

Three Hong Kong banks' PONV subordinated debt have been placed on review for upgrade. Moody's currently rates these banks' PONV subordinated debt two notches below their standalone baseline credit assessment (BCA) and one notch below their legacy subordinated debt rating. The wider notching took into account uncertainty over the timing of loss absorption given potential regulatory discretion over the determination of non-viability.

Moody's expects the revised bank resolution framework to reduce the uncertainty over when Hong Kong resolution authority will declare banks to be non-viable. Hong Kong's legislation specifies conditions that need to be met before the resolution authority can initiate resolution action on banks. At the conclusion of the review, Moody's expects to upgrade the affected banks' PONV subordinated debt ratings by one notch.

Moody's expects to conclude the reviews on banks' ratings in the coming few months. During the review period, Moody's will assess the impact of the new methodology on rated instruments and will focus on advanced LGF analysis taking into account banks' latest published financial data, finalization of the LAC rules for Hong Kong, application of the LAC rules to specific banks, and where appropriate, banks' public announcements of their issuance plans, as well as the likelihood of Hong Kong government support for the rated banks.

The principal methodology used in these ratings was Banks published in April 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

RELATED RESEARCH REFERENCES

For further details please refer to the following:

- Bank rating methodology: Rating Methodology: Banks - April 2018

https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1098718

- Press release: Moody's designates Hong Kong as an operational resolution regime (ORR) in an update to its banks rating methodology

https://www.moodys.com/research/Moodys-designates-Hong-Kong-as-an-operational-resolution-regime-ORR--PR_382614

Please see the credit opinions of specific issuers on www.moodys.com for the more detailed implications of the issuer rating actions.

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.

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 rating 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.

Sonny Hsu, CFA
VP - Senior Credit Officer
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
Client Service: 852 3551 3077

Minyan Liu
Associate Managing Director
Financial Institutions Group
JOURNALISTS: 852 3758 1350
Client Service: 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
Client Service: 852 3551 3077

No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

CREDIT RATINGS ISSUED BY MOODY'S INVESTORS SERVICE, INC. AND ITS RATINGS AFFILIATES (“MIS”) ARE MOODY’S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MOODY’S PUBLICATIONS MAY INCLUDE MOODY’S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. MOODY’S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT OR IMPAIRMENT. SEE MOODY’S RATING SYMBOLS AND DEFINITIONS PUBLICATION FOR INFORMATION ON THE TYPES OF CONTRACTUAL FINANCIAL OBLIGATIONS ADDRESSED BY MOODY’S RATINGS. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS AND MOODY’S OPINIONS INCLUDED IN MOODY’S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. MOODY’S PUBLICATIONS MAY ALSO INCLUDE QUANTITATIVE MODEL-BASED ESTIMATES OF CREDIT RISK AND RELATED OPINIONS OR COMMENTARY PUBLISHED BY MOODY’S ANALYTICS, INC. CREDIT RATINGS AND MOODY’S PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS AND MOODY’S PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. NEITHER CREDIT RATINGS NOR MOODY’S PUBLICATIONS COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY’S ISSUES ITS CREDIT RATINGS AND PUBLISHES MOODY’S PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL, WITH DUE CARE, MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE.

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Moody’s Investors Service, Inc., a wholly-owned credit rating agency subsidiary of Moody’s Corporation (“MCO”), hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by Moody’s Investors Service, Inc. have, prior to assignment of any rating, agreed to pay to Moody’s Investors Service, Inc. for ratings opinions and services rendered by it fees ranging from $1,000 to approximately $2,700,000. MCO and MIS also maintain policies and procedures to address the independence of MIS’s ratings and rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold ratings from MIS and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually at www.moodys.com under the heading “Investor Relations — Corporate Governance — Director and Shareholder Affiliation Policy.”

Additional terms for Australia only: Any publication into Australia of this document is pursuant to the Australian Financial Services License of MOODY’S affiliate, Moody’s Investors Service Pty Limited ABN 61 003 399 657AFSL 336969 and/or Moody’s Analytics Australia Pty Ltd ABN 94 105 136 972 AFSL 383569 (as applicable). This document is intended to be provided only to “wholesale clients” within the meaning of section 761G of the Corporations Act 2001. By continuing to access this document from within Australia, you represent to MOODY’S that you are, or are accessing the document as a representative of, a “wholesale client” and that neither you nor the entity you represent will directly or indirectly disseminate this document or its contents to “retail clients” within the meaning of section 761G of the Corporations Act 2001. MOODY’S credit rating is an opinion as to the creditworthiness of a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail investors.

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MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any rating, agreed to pay to MJKK or MSFJ (as applicable) for ratings opinions and services rendered by it fees ranging from JPY125,000 to approximately JPY250,000,000.

MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.

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