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Rating Action:

Moody's takes rating actions on nine Hong Kong banks

 The document has been translated in other languages

Global Credit Research - 24 Jun 2013

Hong Kong, June 24, 2013 -- Moody's Investors Service has changed the outlooks for the bank financial strength ratings (BFSRs)/Baseline Credit Assessments (BCAs) of eight Hong Kong banks to negative from stable, and one bank's BFSR outlook to stable from positive.

In addition, Moody's has lowered Wing Lung Bank's BFSR by one notch, and affirmed all other ratings of the nine banks.

Moody's has affirmed the deposit ratings of all the nine banks involved in this rating action. However, it has changed the outlooks on the deposit ratings for five of the nine banks concerned to negative from stable, while those for the other four banks are unchanged at stable. Please click here for a list of the affected credit ratings. http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_155742. This list is an integral part of this press release and identifies each affected issuer.

RATINGS RATIONALE

The rating actions follow Moody's decision to revise the outlook for Hong Kong's banking system to negative from stable.

The change in the banking system outlook reflects the agency's concerns regarding persistent negative real interest rates and potential property bubbles in Hong Kong, as well as Hong Kong banks' growing exposures to Mainland China. These factors could result in adverse operating conditions for Hong Kong banks over the outlook horizon.

Residential, commercial, and industrial property prices in Hong Kong have all more than doubled since 2009 and are currently at historically high levels. There is growing integration between Hong Kong's economy with that of the Mainland. While the economic integration creates business opportunities for banks and their customers, it also entails risks. The Mainland's transition from an export- and investment-driven economic growth model to a consumption-led model creates uncertainties and may expose overcapacity in certain industries.

A separate press release to be published today elaborates on the rationale for the change in the banking system outlook.

All of the nine affected banks reported problem loan ratios that were at or near historically low levels at end-2012, and their current asset quality metrics compare very favorably against global peers. However, latent risks are building in the banking system, as domestic leverage increases and the exposures to the Mainland grow.

Moody's anticipates a turning point during the outlook horizon when these banks' problem loans will rise from current low levels as conditions become more challenging. While the precise timing of the turning point cannot be determined with precision, a tightening of US monetary policy, which directly affects Hong Kong via the Hong Kong dollar peg, is likely to be one trigger for a cyclical deterioration in asset quality.

At end-2012, local property-related lending, trade and export finance, and Mainland exposures together accounted for more than half of the banks' total loans.

Nevertheless, Hong Kong banks remain among the highest-rated banks globally, and their credit ratings continue to reflect strengths such as solid levels of capitalization, sound funding profiles and liquidity positions, and established retail franchises.

Four of the nine rated banks affected by this rating action are subsidiaries of Mainland banks. Most of them have grown at a faster pace than their peers owing to customer referrals from their parents. Their Mainland corporate exposures are higher than the peer average, as they serve the offshore financing needs of their parent banks' corporate customers. The change in outlook for these banks' BFSRs takes into account these banks' increasing integration with their parents and the fact that the quality of their Mainland exposures have not been fully tested in an economic downturn.

The negative outlooks on deposits for five of the nine banks reflect the negative outlooks on their BFSRs. The outlooks for the other four banks are stable owing to expected strong support from these banks' overseas and Mainland parents, which would likely mitigate downward pressure on their standalone credit quality.

The Hong Kong subsidiaries are of strategic importance to their overseas and Mainland parents, given Hong Kong's position as a major regional financial hub, and the overlap in customers between the subsidiaries and their parents.

The subordinated debt ratings of four of the nine banks incorporate elements of systemic support, as they are currently notched off the banks' deposit ratings.

Moody's placed the subordinated debt ratings of these four banks on review for downgrade on 3 June 2013, as indicated in this press release. These banks' subordinated debt ratings remain on review for downgrade following today's rating actions.

Moody's Global Bank Rating Methodology published on 31 May 2013 indicated that going forward, the default approach for rating bank subordinated debt is to notch them off banks' adjusted baseline credit assessments. The update in methodology has led to simultaneous reviews for bank subordinated debt ratings in several Asian countries.

BANK-SPECIFIC RATING CONSIDERATIONS

BANK OF EAST ASIA, LTD

Bank of East Asia's C-/baa2 BFSR and BCA reflect its strong liquidity profile, improving, albeit below peer-average profitability, and its large and growing Mainland exposures. The bank's A2 long-term deposit ratings incorporate three notches of systemic support. The potential systemic support stems from the bank's market position as the largest independent local bank.

The outlooks on the BFSR/BCA and deposit ratings were changed to negative from stable reflecting Moody's concerns over the bank's large and growing Mainland exposures, as well as an expected more challenging operating condition in Hong Kong over the outlook horizon. Bank of East Asia has one of the largest branch networks in Mainland China among foreign banks. Mainland loan exposures accounted for 43% of overall loans at end-2012, and consisted largely of corporate loans. Given limited growth opportunities in Hong Kong and strong demand for credit in China, we expect Mainland exposures to account for an increasing share of overall loans. The bank's large and fast-growing Mainland exposures render it susceptible to potential adverse developments in the Mainland economy.

Due partially to its fast growth and modest internal capital generation, the bank has raised external capital on three different occasions since 2009. Nevertheless, fresh equity raising in 2012 and the sale of majority ownership in its US subsidiary brought the bank's Tier 1 ratio to a satisfactory 10.7% at end-2012.

Bank of East Asia's profitability has been modest, with three-year average return on risk-weighted assets of 1.42% between 2010-2012. In line with its Hong Kong peers, Bank of East Asia has a liquid balance sheet, with funding consisting largely of customer deposits.

What Could Change the Rating Up/Down

Bank of East Asia's deposit rating of A2 is high and is unlikely to be upgraded.

The bank's ratings may be downgraded if persistent strong loan and asset growth outweigh capital generation, leading to Tier 1 capitalization below 9.5%. Further increases in Mainland exposures, or a material slowdown in the Hong Kong and Mainland economies may also lead to downgrades.

CHINA CITIC BANK INTERNATIONAL LTD

China CITIC Bank International's standalone D+/baa3 BFSR and BCA reflect its good capitalization, revamped risk management framework and processes, and steadily improving asset quality metrics. The positive factors are offset by its high borrower concentration, below peer-average profitability, and increasing exposures to Chinese borrowers. The bank's Baa2 long-term deposit rating factors in very high parental support from China CITIC Bank Corporation Limited (deposits Baa2 stable, BFSR D/BCA ba2 stable)), which owns 70% of the bank.

The outlook on the bank's BFSR/BCA was changed to stable from positive and reflect risks associated with the bank's growing Mainland exposures. Mainland loans amounted to 32% of overall loans at end-2012, and are likely to increase further as the bank increasingly serves the cross border banking needs of its Mainland customers. Growth in Mainland exposures renders the bank susceptible to potential adverse developments in the Mainland economy.

The bank has maintained sound capitalization over the past three years. Its Tier 1 ratio was 11.8% at end-2012. In the event of stress, capital support from China CITIC Bank is likely. The impaired loan ratio at end-2012 was roughly in-line with the rated Hong Kong bank average at 0.45% of loans. Growing volume of Mainland business has contributed to improved margins and overall profitability. Nevertheless, profitability continues to lag behind the Hong Kong peer average with net return on average risk-weighted assets of 1.32%.

What Could Change the Rating Up/Down

China CITIC Bank International's deposit rating could be upgraded if the parent's deposit ratings were upgraded. An upward adjustment of the bank's standalone assessment will depend on the bank maintaining its good asset quality metrics and capitalization, and demonstrating the sustainability of its franchise serving the offshore banking needs of Mainland customers.

Any decline in parental support or a downgrade in the parent's rating could lead to a downgrade of the bank's deposit rating. A material increase in riskier Mainland exposures may lead to lower standalone assessment. A material deterioration in the bank's capitalization (Tier 1 ratio below 9.5%) and/or asset quality (with impaired loans accounting for more than 3% of overall loans) due to imprudent expansion or misjudged credit allocation could also lead to a lower standalone assessment.

CHINA CONSTRUCTION BANK (ASIA) CORP. LTD

China Construction Bank (Asia) Corp. Ltd. ("CCB Asia")'s standalone BFSR and BCA of C/a3 reflect its strong capitalization, good asset quality metrics, and growing Mainland exposures. The bank's A2 deposit rating incorporates very strong expected support from its parent China Construction Bank Corporation (deposits A1 stable, BFSR D+/BCA ba1 stable).

The outlook on the BFSR/BCA was revised to negative from stable reflecting expected further decline in the bank's capitalization, risks associated with the bank's growing Mainland exposures, and Moody's assessment of unfavorable operating conditions for small and medium sized enterprises in the Pearl River Delta. CCB Asia's Mainland bank exposures amounted to 39% of total assets while exposures to Mainland corporate borrowers represented an additional 13% at end-2012. As the bank continues to grow at a pace faster than the industry average, its capitalization is likely to decline further from a high level of 16.6% at end-2012. Nevertheless, the outlook on the bank's deposit rating remains stable given our expectation of very strong support from its parent.

CCB Asia has maintained sound asset quality metrics in recent years, and its impaired loan ratio was 0.22% at end-2012. CCB Asia's profitability has been below its peer average in Hong Kong. The bank's three-year average return on average risk-weighted assets between 2010 and 2012 was 0.91%. CCB Asia has a weaker funding profile than its peers. The bank's loan to deposit ratio was consistently above 90% between 2009 and 2011 due to strong customer loan growth.

What Could Change the Rating Up/Down

CCB Asia's deposit rating could be upgraded if the deposit ratings of its parent China Construction Bank were upgraded. The bank's BCA is high relative to its size and is unlikely to be upgraded.

CCB Asia's deposit rating could be downgraded if parental support diminishes. The bank's BCA will likely be adjusted downward if there is material shift away from its traditional focus on serving local Hong Kong customers, or if there is a weakening in its risk management and controls. Its BCA could also be adjusted downgraded if there is a material decline in its capitalization due to aggressive expansion, with Tier 1 capitalization falling below 12%.

DAH SING BANK, LTD

Dah Sing Bank's standalone BFSR/BCA of C/a3 reflects its sound asset quality, adequate capitalization and good liquidity profile. These positive factors are partially offset by its high borrower concentration and growing exposures to Mainland borrowers. The bank's long-term deposit rating is in line with its BCA at A3.

The outlooks on the bank's BFSR/BCA and deposit ratings were revised to negative from stable reflecting risks stemming from the potential asset bubbles in Hong Kong, and the unfavorable operating environment for small and medium sized enterprises in the Pearl River Delta due to rising land and labor costs, appreciating RMB, and slow growth in export orders.

Dah Sing Bank's overall impaired loan ratio was 0.35% at end-2012. The bank's large exposures to small and medium enterprises in the trading and export sectors and growing exposures to Mainland customers raise concerns and may pose challenges when the credit cycle turns. Dah Sing Bank has maintained satisfactory capitalization, with Tier 1 ratios of around 10% since 2009. The bank also maintains adequate liquidity and is funded primarily by deposits. The bank's loan-to-deposit ratio stood at a healthy level of 73% at end-2012. Intense competition, low interest rates, and elevated operating expenses have weighed on the bank's profitability. Net income over average risk-weighted assets was 1.46% in 2012.

What Could Change the Rating Up/Down

A rating upgrade is unlikely as the bank's ratings are already high relative to its size. However, upward pressure could arise if: (1) its profitability improves, with a return of 1.8% or above on average risk-weighted assets; and (2) its franchise and market position strengthen substantially.

Deterioration in the operating environment can trigger a downgrade for the bank's rating. A material rise in NPLs, whether in Hong Kong or Mainland-related would be negative for the rating. The bank's rating could also be downgraded if strong asset growth weakens the bank's capitalization, such that Tier 1 ratio falls below 9.5%, or if impaired loan ratio exceeds 1.5%.

DBS BANK (HONG KONG) LTD

DBS Bank (HK)'s BFSR/BCA of C+/a2 reflects its strong capitalization and adequate liquidity profile. Nevertheless, negative real interest rates, potential bubbles in the Hong Kong property market, and difficult operating conditions for small and medium enterprises pose risks for the bank. The bank's Aa3 deposit ratings incorporate a very high probability of support from its parent DBS Bank Ltd (deposits Aa1 negative, BFSR B/BCA aa3 negative), given the bank's strategic importance and its close affiliation with its parent and other members of the group.

The outlooks on the bank's BFSR/BCA and deposit ratings were revised to negative from stable reflecting risks stemming from potential asset bubble in Hong Kong, and unfavorable operating environment for small and medium sized enterprises in the Pearl River Delta due to rising costs, appreciating RMB, and limited growth in export orders. Sizable exposures to Hong Kong properties and small and medium enterprises render the bank susceptible to deterioration in domestic and external economic conditions. The outlook on the parent's BFSR is also negative, and reflects its relatively fast changing risk profile as it pursues a regional expansion strategy.

DBS Bank (HK)'s capital adequacy improved in 2012 due to strong internal capital generation and a decline in loan balances. The bank's Tier 1 ratio rose to 14.3% at end-2012. Capitalization will likely decline in 2013 with expected loan growth.

The bank has adequate liquidity profile and is largely funded by customer deposits. The loan-to-deposit ratio was 82.7% at end-2012, down from 105.5% a year ago. DBS Bank (HK)'s asset quality metrics have improved in recent years, and the impaired loan ratio fell to 0.78% at end-2012.

What Could Change the Rating Up/Down

The deposit rating is already high and is therefore unlikely to be upgraded. For the BCA to be adjusted upward, the bank would have to substantially strengthen its franchise.

The bank's deposit rating may be downgraded if there is a weakening in parental support or if the parent's BCA is adjusted downward.

Deterioration in operating conditions or sustained economic imbalances may trigger a downgrade. Adverse developments in developed markets, Mainland China or the local property market can all negatively impact the bank due to its sizable property loans and exposures to SMEs.

The BCA can be also adjusted downward if asset quality deteriorates due to aggressive credit growth, with impaired loans rising above 2% of gross loans. A material decline in capitalization with its Tier 1 ratio falling below 9.5% may also trigger a downgrade.

INDUSTRIAL AND COMMERCIAL BANK OF CHINA (ASIA) LTD

ICBC Asia's BFSR/BCA of C-/baa2 reflect its sound capitalization and good asset quality. It also takes into account its corporate banking focus and underdeveloped retail presence, and its increasing exposures to Mainland customers through referrals from its parent Industrial & Commercial Bank of China (deposits A1 stable, BFSR D+/BCA ba1 stable). ICBC Asia's long-term deposit ratings of A2 incorporated three notches of uplift from expected strong support from the parent.

The outlook on the BFSR/BCA was revised to negative from stable reflecting risks associated with the bank's fast pace of growth relatively to peers, underdeveloped retail franchise, and greater reliance on wholesale funding. Nevertheless, the outlook on the bank's deposit rating remains stable given our expectation of very strong support from its parent.

ICBC Asia's total assets nearly doubled between end-2009 and end-2012, while customer advances rose by 50%. Trade finance loans made up 27% of total loan balance at end-2012. Most of the bank's trade finance loans are guaranteed by its parent, rendering them interbank exposures to its parent.

ICBC Asia relies to a greater extent on wholesale funding than its peers. Customer deposits accounted for two thirds of overall liabilities at end-2012. Despite strong loan and asset growth, equity injections from the parent between 2010 and 2012 helped the bank maintain its capitalization. Tier 1 capitalization was strong at 12.04% at end-2012. The bank's asset quality metrics are comparable with the peer average in Hong Kong, with impaired loans amounting to 0.47% of gross loans at end-2012.

What Could Change the Rating Up/Down

ICBC Asia's deposit rating is one notch below that of its parent. The bank's deposit rating may be upgraded if its parent's deposit rating is upgraded. The bank's good capitalization and asset quality metrics are comparable to banks with higher BCAs. However, the bank's strong loan and asset growth in recent years, relatively under-developed retail franchise, and greater reliance on wholesale funding weigh on its rating. The bank's BCA may be adjusted upward if it can maintain its current capitalization and asset quality, strengthen its retail franchise, and reduce its reliance on wholesale funding.

ICBC Asia's deposit rating may be downgraded if parental support weakens. The bank's BCA may be adjusted downward if its asset quality deteriorates due to aggressive and imprudent credit growth, with impaired loans rising above 2.0% of gross loans. A decline in its Tier 1 ratio below 9% may also trigger a review for downgrade. Further increase in direct Mainland exposures and deterioration in the operating environment may also lead to a BFSR downgrade.

STANDARD CHARTERED BANK (HONG KONG) LTD

Standard Chartered Bank (Hong Kong) Ltd (Stanchart HK)'s BFSR and BCA of B-/a1 take into account its well-established franchise in Hong Kong, good asset quality, strong profitability and very good liquidity. These positive factors are partially offset by its increased leverage following three years of strong loan growth. The bank's Aa3 deposit rating incorporates Moody's assessment of very high likelihood of support from the Hong Kong government.

The outlook on the bank's BFSR/BCA was revised to negative from stable reflecting the bank's higher balance sheet leverage relative to peers and Moody's expectation of more challenging operating conditions over the outlook horizon. Nevertheless, the outlook on the bank's deposit rating remains stable given our expectation of very strong support from its parent and the Hong Kong government. Strong loan and asset growth in recent years have led to increased balance sheet leverage. The bank's tangible common equity/total asset ratio declined to 4.7% at end-2012 from 5.5% at end-2009, and compares unfavorably against Hong Kong peers.

Stanchart (HK) is the fourth largest bank in Hong Kong in terms of total assets and has strong market positions in retail and corporate banking. The bank has strong deposit gathering capability due to its strong branch network and status as one of three note-issuing banks.

Stanchart (HK) has consistently maintained sound asset quality metrics since end-2006. The bank has generated above-peer average risk-adjusted returns due to its low funding costs, strong contributions from wealth management, treasury, and trade finance businesses as well as low credit costs.

What Could Change the Rating Up/Down

The bank's current ratings are high relative to global peers and a rating upgrade is unlikely.

The bank's deposit rating could be downgraded if parental support diminishes. The BFSR could be downgraded if the bank maintains its higher balance sheet leverage than peers. Deterioration in the operating environment or an increase in economic imbalances can also lead to a lower BFSR.

WING HANG BANK, LTD

Wing Hang Bank's deposit rating, standalone BFSR and BCA of A2/C+/a2 reflect its good asset quality, sound capitalization and conservative liquidity profile. Nevertheless, prevailing low interest rates, elevated property prices, and growing exposures to Mainland China pose risks and potential challenges for Wing Hang Bank.

The outlooks on the bank's BFSR/BCA and deposit ratings were revised to negative from stable reflecting risks stemming from potential asset bubble in Hong Kong, and unfavorable operating environment for small and medium sized enterprises in the Pearl River Delta due to rising land and labor costs, appreciating RMB, and slow growth in export orders.

Wing Hang Bank has maintained sound asset quality metrics, with an impaired loan ratio of 0.45% at end-2012. Amid steady economic integration between Hong Kong, Macau and Mainland China, developments on the Mainland will have growing influence on the bank's asset quality going forward. Advances for use in Mainland China accounted for 19% of total loans outstanding at end-2012.

The bank maintained good capitalization with Tier 1 ratio of 10.0% at end-2012. The bank's liquidity profile also remained conservative with a loan-to-deposit ratio of 69%. Its average return on risk-weighted assets during 2010-2012 was 1.86% excluding large one-off gains on property sales in 2011.

What Could Change the Rating Up/Down

Wing Hang Bank's current ratings are high relative to its size, and are unlikely to be upgraded.

Deterioration in operating conditions or an exacerbation in economic imbalances can trigger a rating downgrade. Any aggressive expansion that leads to deteriorations in capitalization and asset quality, with Tier 1 ratio falling below 9.5%, or impaired loans amounting to 1.5% of gross loans, may also lead to a rating downgrade.

WING LUNG BANK LTD

Wing Lung Bank's BFSR and BCA of C/a3 reflects its good capital adequacy and asset quality. These positive factors are offset by its fast pace of expansion and growing Mainland exposures. Parental support is highly likely in the event of need.

The one notch decline in the bank's BFSR and BCA to C/a3 and the negative outlook on the bank's BFSR/BCA and deposit rating reflect Moody's concerns over the bank's growing Mainland exposures, unfavorable operating conditions for small and medium enterprises in the Pearl River Delta, and expected deterioration in overall operating conditions over the outlook horizon. The bank's deposit rating remains at A2 while the BFSR was lowered by one notch, given Moody's expectation of strong parental support.

The bank has grown its loans and assets strongly since it was acquired by China Merchants Bank in 2009. Its total assets grew by 53% to end-2012 from end-2009. The bank has focused on serving the offshore banking needs of its parent's Mainland customers. Loans to Mainland customers grew to HKD30.2 billion at end-2012 from HKD3.9 billion at end-2009, and made up 34% of loans at end-2012.

Wing Lung Bank has maintained good asset quality metrics amid its business expansion, and had an impaired loan ratio of 0.1% at end-2012. Nevertheless, the bank's capitalization has weakened as loan and asset growth outpaced internal capital generation, with Tier 1 ratio falling to 10.0% at end-2012 from 12.0% at end-2008.

Wider margins on lending to Mainland enterprises and improved operating efficiency led to higher profitability. The bank's three-year average net return on average risk-weighted assets between 2010 and 2012 was 1.91%.

What Could Change the Rating Up/Down

The bank's BCA and long-term deposit rating are high and therefore unlikely to be upgraded.

Deterioration in operating conditions or increase in economic imbalances can trigger a rating downgrade. Further increase in the bank's Mainland exposures may also lead to a downgrade. Any weakening in capitalization due to strong asset growth, with its Tier 1 ratio falling below 9.5%, or an increase in impaired loan ratio to above 1.5% may also trigger a downgrade.

The principal methodology used in these ratings was Global Banks published in May 2013. Please see the Credit Policy 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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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.

Sonny Hsu
Vice President - Senior 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 takes rating actions on nine Hong Kong banks
No Related Data.

 

© 2014 Moody's Corporation, Moody's Investors Service, Inc., Moody's Analytics, Inc. and/or their licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

 


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