Nov 20 -
Summary analysis -- Hang Seng Bank Limited ------------------------ 20-Nov-2012
CREDIT RATING: AA-/Stable/A-1+ Country: Hong Kong
Primary SIC: Commercial banks,
Mult. CUSIP6: 41043C
Credit Rating History:
Local currency Foreign currency
29-Nov-2011 AA-/A-1+ AA-/A-1+
27-Jul-2006 AA/A-1+ AA/A-1+
Ratings Score Snapshot
Issuer Credit Rating AA-/Stable/A-1+
Business Position Strong (+1)
Capital and Earnings Adequate (0)
Risk Position Strong (+1)
Funding and Liquidity Average
and Strong (0)
GRE Support 0
Group Support 0
Sovereign Support +1
Additional Factors 0
The stable outlook reflects our belief that Hang Seng will remain a bank with high systemic importance in Hong Kong and that it has a high likelihood of receiving extraordinary support from the Hong Kong government in times of need. We also expect Hang Seng to continue to be a core subsidiary of HSBC. The stable outlook also reflects our view that there is no meaningful pressure on Hang Seng's SACP.
Under our criteria, we may raise the issuer credit rating on a subsidiary (such as Hang Seng) above its SACP to reflect the scope for either potential group support or local systemic support, whichever leads to the highest rating. Even if the group credit profile (GCP) of HSBC, incorporating U.K. sovereign support, were to move to 'a+' from 'aa-', the ratings on Hang Seng would not move. However, we would expect to continue to reflect one notch of systemic support from the Hong Kong government. This approach further reflects our view that Hang Seng is subject to strong regulatory oversight by the Hong Kong Monetary Authority. While the bank does have some exposure to other parts of the HSBC group, we consider this controlled.
An upgrade could be triggered by a strengthening of Hang Seng's capitalization, such that we believe the bank's RAC ratio will exceed 10%, or we consider the bank's funding profile to be above average in Hong Kong. We consider this unlikely in the coming two years.
A downgrade would occur if: (1) we downgrade the GCP on HSBC or we no longer consider Hang Seng as its core subsidiary; and (2) we downgrade the issuer credit ratings on Hong Kong and we lower the SACP of Hang Seng to 'a'.
We base our ratings on Hang Seng Bank Limited on the bank's "strong" business position, "adequate" capital and earnings, "strong" risk position, "average" funding, and "strong" liquidity, as our criteria define these terms, with an anchor at 'a-' as a starting point. The stand-alone credit profile (SACP) of Hang Seng is 'a+'. The counterparty credit rating is one notch higher than this, reflecting our view of a high likelihood of government support, due to Hang Seng's "high" systemic importance in Hong Kong (AAA/Stable/A-1+; cnAAA/cnA-1+) and our assessment of the government as "highly supportive" toward its banking sector.
At the same time, we consider Hang Seng to be a core subsidiary of its ultimate parent, U.K.-incorporated bank holding company, HSBC Holdings PLC (HSBC; A+/Negative/A-1), due to its integral role within HSBC's growth strategy in the Greater China region and material size within the HSBC group. This group relationship benefits the long-term counterparty credit rating on Hang Seng by equalizing it with the 'AA-' ratings on the HSBC group's other core operating entities. As a result, the eligibility for an uplift of ratings on Hang Seng due to group support is the same as that due to government support in Hong Kong.
Our 'a-' anchor SACP for Hang Seng draws on our Banking Industry Country Risk Assessment (BICRA) methodology and our view of the economic and industry risks in the countries where Hang Seng operates. The economic risk score of '3' is based on the weighted average of its private-sector loans to nonbanks in each country in which it operates, including above 80% in Hong Kong. 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. The industry risk score of '1' benefits from Hong Kong's strong institutional framework and effective banking regulations and supervision. The sector's funding is well supported by the customer deposit base. Banks' risk appetite is generally restrained, and we do not observe any market distortions in Hong Kong.
As the third-largest bank in Hong Kong, Hang Seng has a strong market position in retail and commercial banking. Retention in Hang Seng's customer deposit base is likely to remain high, benefiting from the bank's long-established franchise, extensive domestic branch network, and a general recognition of the bank's status as a subsidiary of HSBC Group. Hang Seng's revenue stability has been well tested throughout economic cycles in the past two decades and remains more resilient than domestic peers'. The bank has a strong revenue mix with more than half of the total revenue coming from retail banking and wealth management. It still generates most of its revenue in Hong Kong. Hang Seng's very strong operating performance over time is also a result of its successful management and corporate strategy. We expect the bank to continue to expand in China and follow conservative underwriting standards.
Hang Seng's capitalization mainly reflects our projection that its risk-adjusted capital (RAC) ratio will stay above 7% over the next 24 months. We expect the bank to maintain a strong earnings buffer but a fairly high dividend payout ratio.
We consider that the standard capital charge applied to the loan book in the RAC framework is conservative in Hang Seng's case, in view of the bank's strong track record of managing credit risks. While we expect credit cost to rise from the current low base amid an increasingly challenging economic environment, Hang Seng's prudent loan underwriting standards are likely to offset the potential pressure. We also expect the bank to maintain its slowed loan growth and keep exposure to complicated financial instruments very low. The pace of Hang Seng's loan growth fell to 5% in the first half of 2012 and 2% in 2011, after rapid growth of 37% in 2010.
Hang Seng's funding profile is comparable with the industry average in Hong Kong, where retail banks are generally well supported by customer deposits. The bank's liquidity is strong, in view of its rich pool of liquid assets.
Related Criteria And Research
-- Hang Seng Bank Limited 'AA-/A-1+' And 'cnAAA/cnA-1+' Ratings Affirmed; Outlook Stable, Oct. 11, 2012
-- Ratings On Some HSBC Asia-Pacific Entities Affirmed; Outlook Stable; HSBC Insurance (Asia) Remains On Watch Neg, Aug. 23, 2012
-- Outlook On HSBC Holdings PLC & Certain Subs Revised To Negative On Reported Control Failings; 'A+/A-1' Ratings Affirmed, Aug. 23, 2012
-- Banks: Rating Methodology And Assumptions, Nov. 9, 2011
-- Group Rating Methodology And Assumptions, Nov. 9, 2011
-- Banking Industry Country Risk Assessment Methodology And Assumptions, Nov. 9, 2011
-- Bank Capital Methodology And Assumptions, Dec. 6, 2010