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Rating Action:

Moody's revises outlook of three Hong Kong banks to negative; downgrades Bank of East Asia

 The document has been translated in other languages

17 Mar 2016

Hong Kong, March 17, 2016 -- Moody's Investors Service has today revised to negative from stable the rating outlook on three Hong Kong banks.

The rating action reflects Moody's expectations of a more challenging operating environment for banks in Hong Kong.

On 12 March 2016, Moody's changed the outlook on Hong Kong government's Aa1 sovereign rating to negative from stable. The revision of the sovereign outlook reflects our concern that Hong Kong's increasing economic and financial linkages with China (Aa3, negative) give rise to potential negative spillovers from China and ultimately weaker growth.

In addition, Hong Kong banks continue to operate in an environment with pronounced imbalances, including high private-sector leverage and elevated property prices. The more challenging operating environment has been reflected in Moody's change of Hong Kong's Macro Profile to "Strong" from "Strong+".

The banks affected are The Hongkong and Shanghai Banking Corporation Limited (HSBC), Hang Seng Bank Limited, and Dah Sing Bank, Limited.

At the same time, Moody's has affirmed their baseline credit assessments (BCA), adjusted BCAs, counterparty risk assessments (CR Assessments), and ratings at current levels.

In addition, Moody's has downgraded Bank of East Asia's long-term and short-term deposit ratings to A3/Prime-2 from A2/Prime-1. Moody's has also downgraded its long-term senior unsecured debt rating to A3; senior unsecured commercial paper rating to Prime-2; and long-term CR Assessments to A2(cr). The outlook on all ratings remains negative.

Concurrently, Moody's has affirmed the bank's BCA, adjusted BCA, subordinated debt and non-cumulative preference stock ratings, and short-term CR Assessment.

Outlooks, which provide an opinion on likely rating direction over the medium term, are assigned only to banks' long-term deposit, issuer and senior unsecured debt ratings.

The list of affected ratings follows at the end of the press release.

MACRO PROFILE CHANGE

The change in Moody's assessment of Hong Kong's Macro Profile to "Strong" from "Strong+" takes into account our expectation of a deterioration in the operating conditions for Hong Kong banks.

Hong Kong's increasing economic and financial linkages with Mainland China suggest that negative spillover effects from the slowing economic growth and challenging credit conditions in China will likely lead to more difficult operating conditions for banks in Hong Kong.

In addition, high levels of private-sector borrowing and elevated property prices continue to pose risks to the macro-economy and weigh on the banks' credit profiles.

RATINGS RATIONALE

The expected more challenging operating conditions weigh on the credit profiles of most rated Hong Kong banks and led Moody's to revise the outlook to negative from stable for HSBC, Hang Seng Bank, and Dah Sing Bank.

These three banks' current impaired loan ratios are exceptionally low at below 0.6%, due to benign operating conditions in Hong Kong since the global financial crisis. However, the expected deterioration in operating conditions will likely lead them to report increases in impaired loans in coming years.

For HSBC and Hang Seng Bank, their overall performances have been resilient in the last few years. In addition, their earnings could benefit from rises in interest rates. However, Moody's expects any increases in interest rates to be gradual and modest over the next two years. Moreover, a weakening operating environment in HSBC's and Hang Seng Bank's key markets -- including Hong Kong, China and some other economies in Asia Pacific -- would likely pressure asset quality and profitability from their current strong levels over the next 12-18 months.

Meanwhile, the deposit and senior unsecured debt ratings of Bank of East Asia incorporate multiple notches of support from the Hong Kong government. The downgrade of its deposit and senior unsecured ratings therefore considers that the government's support for the bank could be weaker than what Moody's had previously assessed. Moody's expectation of the reduced capacity of the Hong Kong government to provide support, as reflected in its negative outlook -- and the high level of support received from the Hong Kong government relative to other Hong Kong banks -- led Moody's to lower its support assumption.

In addition, the negative outlook on Bank of East Asia takes into account both the expected weaker operating conditions and potentially lower level of government support, given the likelihood that Hong Kong will adopt a bail-in resolution regime.

In view of their negative outlooks, Moody's does not expect any upward rating pressure on these four banks in the near term. However, their outlooks could be revised to stable if macro-economic conditions in Hong Kong improve and these banks -- HSBC, Hang Seng Bank, Dah Sing Bank, and Bank of East Asia -- maintain sound financial metrics.

The affected banks' ratings could be downgraded if their fundamentals weaken, as evidenced by an even more challenging operating environment and/or deterioration in their financial metrics.

Moody's had revised the outlooks on six Hong Kong subsidiaries of Chinese banks to negative from stable on 2 March 2016 (https://www.moodys.com/research/Moodys-changes-to-negative-outlook-of-Hong-Kong-and-Macau--PR_344756). These banks are Bank of China (Hong Kong) Limited (Aa3, negative), Chiyu Banking Corporation, Ltd. (A1, negative), China Construction Bank (Asia) Corp. Ltd. (A2, negative), China CITIC Bank International Limited (Baa1, negative), Industrial & Commercial Bank of China (Asia) Ltd. (A2, negative), and Wing Lung Bank Limited (A3, negative).

As these banks' outlooks are already negative, their ratings are not further impacted by the change in Hong Kong's Macro Profile.

The ratings and outlooks for Chong Hing Bank Limited (Baa2, stable) and Shanghai Commercial Bank (A2, stable) are unaffected. While these banks' performances would likely weaken as well, in line with the more challenging operating environment, Moody's also expects their performances to remain consistent with their current rating levels.

The ratings and outlooks for DBS Bank (Hong Kong) Limited (Aa3, stable), OCBC Wing Hang Bank Limited (Aa3, stable) and Public Bank (Hong Kong) Limited (A3, stable) also remain unchanged, because Moody's expects parental support to mitigate the negative pressure on their standalone credit profiles.

LIST OF AFFECTED RATINGS

Issuer: Bank of East Asia, Limited

.... BCA affirmed at baa2

.... Adjusted BCA affirmed at baa2

.... Deposit Rating downgraded to A3/P-2 from A2/P-1

.... Long-term CR Assessment downgraded to A2(cr) from A1(cr)

. Short-term CR Assessment affirmed at P-1(cr)

.... Senior Unsecured Debt downgraded to A3 from A2

.... Senior Unsecured MTN Program downgraded to (P)A3 from (P)A2

.... Senior Unsecured Commercial Paper downgraded to P-2 from P-1

.... Legacy Subordinated Debt affirmed at Baa3

. PONV Subordinated Debt affirmed at Ba1(hyb)

.... Subordinate MTN Program affirmed at (P)Ba1

.... Non-cumulative Preferred Stock affirmed at Ba2(hyb)

.... Outlook for bank remains negative

Bank of East Asia Ltd, Singapore Branch

.... Long-term CR Assessment downgraded to A2(cr) from A1(cr)

. Short-term CR Assessment affirmed at P-1(cr)

.... Senior Unsecured Debt downgraded to A3 from A2

.... Senior Unsecured MTN Program downgraded to (P)A3 from (P)A2

.... Outlook for the branch remains negative

Issuer: Innovate Holdings Limited

.... Pref. Stock Non-cumulative Preferred Stock affirmed at Ba3(hyb)

Issuer: Dah Sing Bank, Limited

.... BCA affirmed at a3

.... Adjusted BCA affirmed at a3

.... CR Assessment affirmed at A2(cr)/P-1(cr)

.... Deposit Rating affirmed at A3/P-2

.... Senior Unsecured MTN Program affirmed at (P)A3

.... Legacy Subordinate Debt affirmed at Baa1

.... PONV Subordinated Debt affirmed at Baa2(hyb)

.... Subordinate MTN Program affirmed at (P)Baa2

. Junior Subordinate Debt affirmed at Baa2(hyb)

. Junior Subordinate MTN Program affirmed at (P)Baa2

.... Outlook for the bank revised to negative from stable

Issuer: Hang Seng Bank Limited

.... BCA affirmed at aa3

.... Adjusted BCA affirmed at aa3

.... CR Assessment affirmed at Aa1(cr)/P-1(cr)

.... Deposit Rating affirmed at Aa2/P-1

.... Deposit Note/CD Program affirmed at (P)Aa2

.... Outlook for the bank revised to negative from stable

Issuer: Hongkong and Shanghai Banking Corp. Ltd (The)

.... BCA affirmed at aa3

.... Adjusted BCA affirmed at aa3

.... CR Assessment affirmed at Aa1(cr)/P-1(cr)

.... Deposit Rating affirmed at Aa2/P-1

.... Issuer Rating affirmed at Aa2

.... Senior Unsecured Debt affirmed at Aa2

.... Senior Unsecured MTN Program affirmed at (P)Aa2

.... Deposit Note/CD Program affirmed at (P)Aa2

.... Senior Unsecured Commercial Paper affirmed at P-1

.... Other Short-term Program affirmed at (P)P-1

.... Junior Subordinated Debt affirmed at A1(hyb)

.... Outlook for the bank revised to negative from stable

Issuer: Hongkong & Shanghai Bank.Corp. (Sydney)

.... CR Assessment affirmed at Aa1(cr)/P-1(cr)

.... Issuer Rating affirmed at Aa2/P-1

.... Deposit Rating affirmed at Aa2/P-1

.... Senior Unsecured Debt affirmed at Aa2

.... Senior Unsecured MTN Program affirmed at (P)Aa2

.... Outlook for the branch revised to negative from stable

Issuer: Hongkong & Shanghai Banking Corp.(Singapore)

.... CR Assessment affirmed at Aa1(cr)/P-1(cr)

.... Senior Unsecured Debt affirmed at Aa2

.... Senior Unsecured MTN Program affirmed at (P)Aa2

.... Other Short-term Program affirmed at (P)P-1

.... Outlook for the branch revised to negative from stable

Issuer: Hongkong and Shanghai Banking Corp Ltd (NZ)

.... CR Assessment affirmed at Aa1(cr)/P-1(cr)

.... Senior Unsecured Debt affirmed at Aa2

.... Senior Unsecured MTN Program affirmed at (P)Aa2

.... Outlook for the branch revised to negative from stable

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.

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.

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 analyst and the Moody's legal entity that has issued the ratings.

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.

Minyan Liu
Associate Managing Director
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 revises outlook of three Hong Kong banks to negative; downgrades Bank of East Asia
No Related Data.
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