TEXT-S&P summary: Bank of China (Hong Kong) Ltd.
(The following statement was released by the rating agency)
Nov 12 -
Summary analysis -- Bank of China (Hong Kong) Ltd. ---------------- 12-Nov-2012
CREDIT RATING: A+/Stable/A-1 Country: Hong Kong
Primary SIC: Commercial banks,
Mult. CUSIP6: 061199
Credit Rating History:
Local currency Foreign currency
29-Nov-2011 A+/A-1 A+/A-1
16-Feb-2007 A-/A-2 A-/A-2
Ratings Score Snapshot
Issuer Credit Rating A+/Stable/A-1
Business Position Strong (+1)
Capital and Earnings Strong (+1)
Risk Position Adequate (0)
Funding and Liquidity Above Average
and Strong (+1)
GRE Support 0
Group Support 0
Sovereign Support 0
Additional Factors 0
The stable outlook primarily reflects the outlook on the long-term rating on China. It also reflects our expectation that BOCHK would maintain its high systemic importance.
A positive rating action is unlikely over the next two years. An upgrade would follow an improvement in the bank's SACP, which would reflect our assessment that the bank's risk position is "strong". Negative pressure on the ratings could arise from: (1) a multiple-notch deterioration in BOCHK's SACP to 'bbb+'; or (2) a one-notch deterioration in the bank's SACP together with a substantially diminishing of the bank's systemic importance to Hong Kong, resulting in our assessment that the bank is of "moderately high importance." We believe the downside scenarios are also unlikely in the next 24 months.
Standard & Poor's Ratings Services bases its ratings on Bank of China (Hong Kong) Ltd. (BOCHK) on the bank's "strong" business position, "strong" capital and earnings, "adequate" risk position, "above-average" funding, and "strong" liquidity, as our criteria define these terms. The stand-alone credit profile is 'a+'.
Our bank criteria use the economic risk and industry risk scores from our banking industry country risk assessment to determine a bank's anchor, the starting point in assigning an issuer credit rating. The anchor for a commercial bank operating only in Hong Kong is 'a-'. Our economic risk assessment of Hong Kong reflects its wealthy, highly competitive, and resilient economy. Substantial potential imbalances have built up in the economy because of volatile housing prices and rapid credit growth over the past few years. The robust financial profile of Hong Kong's household and corporate sector, strong payment culture and effective legal framework, and major banks' underwriting standards mitigate the credit risk in the economy. Industry risk assessments benefit from Hong Kong's strong institutional framework and effective banking regulations and supervision. The customer deposit base supports the sector's funding. Banks' risk appetite is generally restrained and we do not note any market distortions in Hong Kong.
The anchor for BOCHK is 'bbb+', which is based on a blended economic risk score of '4' and an industry risk score of '1'. The economic risk score is based on the weighted average of the proportion of loans in each country where BOCHK operates, including about 75% in Hong Kong and 20% in mainland China.
In our view, BOCHK's position as the second-largest bank in Hong Kong supports its business position. The bank's solid franchise has benefited from its vast and well-entrenched branch network, its status as one of three bank-note issuers in Hong Kong, and its diverse business lines. In addition, BOCHK's balance sheet has a low risk profile. The bank has a predominantly commercial and retail banking business model and a prudent business strategy. Each of these attributes contributes to strong business stability. BOCHK's exclusive role in offshore-renminbi currency clearance in Hong Kong could also help it to strengthen its franchise in the long run.
Our assessment of BOCHK's capital and earnings reflects our expectation that the bank's risk-adjusted capital (RAC) ratio before adjustments for diversification would stay above 10% in the next two years. BOCHK's capitalization compares favorably with that of other large Hong Kong banks, with a RAC ratio before adjustments for diversification of 12.4% at the end of 2011. We expect BOCHK's RAC ratio to stabilize in the next two years due to the bank's significantly moderated asset expansion. In our view, BOCHK's solid earnings profile would support its capitalization. Although fierce competition in the loan market has put the bank's net interest margin under pressure for some time, we expect profitability to improve in 2012 and stabilize in the next few years.
We revised our assessment of BOCHK's risk position to "adequate" from "moderate" to reflect: (1) the recent moderation in the bank's loan growth; (2) its more stable credit growth than major peers' in the past four years; and (3) our expectation that the bank's credit losses would not be worse than the normalized credit losses as per our RAC model. The bank's credit losses could rise significantly from a currently very low level if economic growth in Hong Kong and China falls significantly. In our view, the seasoning of loans and a rapid growth in BOCHK's exposure to borrowers in China, where embedded credit risks are on average higher, could push up the bank's credit losses. Nonetheless, we do not expect BOCHK's credit losses to be worse than the average of its domestic peers', given that its loan mix is biased towards less-risky classes, such as residential mortgages in Hong Kong and large-scale corporate lending.
In our view, BOCHK's funding profile is "above average," while its liquidity position is "strong." BOCHK's stable retail funding and corporate deposit base have contributed to its low loan-to-deposit ratio, which was 66.12% at the end of June 2012, according to our calculation. The bank has negligible reliance on wholesale funding. Its liquidity ratios, such as the ratio of broad liquid assets to short-term wholesale funding and that of net broad liquid asset to customer deposits, have improved since 2011 and are now comparable to other leading banks' in Hong Kong. This is mainly due to elimination of a distortion caused by BOCHK's renminbi-clearance status; a sizable renminbi interbank placement the bank received is now no longer booked on BOCHK's accounts.
The issuer credit rating is the same as the SACP, despite our view that BOCHK has "high" systemic importance to Hong Kong. In respect of the "high" likelihood of extraordinary government support, we have factored our expectations of such support not from the Hong Kong government but from the government of China (AA-/Stable/A-1+; cnAAA/cnA-1+). We have adopted this approach in light of the "special administrative" relationship between the two governments, the fact that BOCHK is a subsidiary of the Chinese government-owned Bank of China Ltd. (A/Stable/A-1; cnAA+/cnA-1), and that a meaningful amount of its loans are extended to Chinese enterprises. Consequently, we believe the Chinese government is more likely to extend extraordinary support to BOCHK than the Hong Kong government.
Related Criteria And Research
-- Banks: Rating Methodology And Assumptions, Nov. 9, 2011
-- Banking Industry Country Risk Assessment Methodology And Assumptions, Nov. 9, 2011
-- Group Rating Methodology And Assumptions, Nov. 9, 2011
-- Bank Hybrid Capital Methodology And Assumptions, Nov. 1, 2011
-- Rating Government-Related Entities: Methodology And Assumptions, Dec. 9, 2010
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