TEXT-S&P summary: Standard Chartered Bank (Hong Kong) Ltd.

Mon Dec 3, 2012 5:08am EST

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Summary analysis -- Standard Chartered Bank (Hong Kong) Ltd. ------ 03-Dec-2012

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CREDIT RATING: AA-/Stable/A-1+ Country: Hong Kong

Primary SIC: Commercial banks,

nec

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Credit Rating History:

Local currency Foreign currency

01-Dec-2011 AA-/A-1+ AA-/A-1+

07-Jun-2006 A+/A-1 A+/A-1

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Ratings Score Snapshot

Issuer Credit Rating AA-/Stable/A-1+

SACP a-

Anchor a-

Business Position Adequate (0)

Capital and Earnings Moderate (-1)

Risk Position Adequate (0)

Funding and Liquidity Above Average

and Strong (+1)

Support +3

GRE Support 0

Group Support 0

Sovereign Support +3

Additional Factors 0

Outlook

The stable outlook reflects our belief that SCBHK will remain a core subsidiary of Standard Chartered group and a bank with high systemic importance in Hong Kong. We also expect SCBHK to maintain its SACP at 'a-' in the next one to two years. The potential increase in the bank's credit risk exposure to entities from China or other Asian countries may put pressure on our assessment of its anchor and SACP. However, SCBHK's risk management capacity in maintaining lower credit losses compared with that of peers facing a similar level of economic risk should mitigate the effects of such exposure.

An upgrade could be triggered by an upgrade of the group credit profile of Standard Chartered PLC.

A downgrade could occur if: (1) We downgrade the group credit profile of Standard Chartered PLC or we no longer consider SCBHK as a core subsidiary of the group; and (2) we lower the SACP of SCBHK to 'bbb+', we downgrade Hong Kong, or we no longer believe the bank has "high systemic importance" in Hong Kong.

Rationale

We base our ratings on Standard Chartered Bank (Hong Kong) Ltd. (SCBHK) on the bank's "adequate" business position, "moderate" capital and earnings, "adequate" risk position, "above-average" funding, and "strong" liquidity, as defined under our criteria, with an anchor at 'a-' as a starting point. SCBHK's stand-alone credit profile (SACP) is 'a-'. The counterparty credit rating is three notches higher than the SACP to reflect our view of the bank'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. SCBHK ranks fourth in terms of market share of deposits and is one of the only three note-issuing banks in Hong Kong.

We recognize SCBHK as a core subsidiary of its ultimate parent, U.K.-incorporated bank holding company, Standard Chartered PLC (A+/Stable/A-1). This group relationship benefits the rating on SCBHK by equalizing it with the 'AA-' ratings on Standard Chartered group's other core operating entities. As a result, the eligibility for an uplift of the ratings on SCBHK due to group support is currently the same as that due to government support in Hong Kong.

The SACP draws on our Banking Industry Country Risk Assessment methodology and our view of the economic and industry risks in the countries where SCBHK operates. Our anchor for SCBHK is based on an economic risk score of '3' and an industry risk score of '1'. The economic risk score for SCBHK is based on the weighted average of its private-sector loans to nonbanks in each country in which it lends, including nearly 90% 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 risks in the economy. Industry risk 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 note any market distortions in Hong Kong.

SCBHK's business is mostly derived from Hong Kong, where it has long-established and sizable operations, with a broad customer base across retail, commercial, and corporate customers. The bank maintains its position as the fourth-largest bank in Hong Kong, with a market share of domestic deposits of slightly less than 10%. SCBHK's revenue has been well tested throughout economic cycles and remains more resilient than that of many of its domestic peers. Nearly 40% of the bank's revenue is attributable to retail and commercial banking, while the rest is from corporate banking and treasury. In our view, SCBHK's underwriting standards are largely at least as conservative as the industry average.

Our assessment of SCBHK's capitalization mainly reflects our projection that the risk-adjusted capital (RAC) ratio will stay below 7% over the next 18 months. We expect the bank to maintain a sound earnings buffer, but we also recognize a record of fluctuating dividend payout ratios.

We recognize that SCHBK's average credit loss over recent economic cycles is lower than the assumption in the RAC framework. We expect the bank to maintain a slower loan growth in 2012 in contrast to rapid growth in 2010, which was well above the industry average in light of the then very low loans-to-deposits ratio. We anticipate that the bank's credit losses will increase from the current low base, amid an increasingly challenging regional economic environment. We expect SCBHK to uphold its prudent underwriting standards, which could mitigate the impact of a potential increase in its credit risk exposure to entities from China and other surrounding emerging Asian jurisdictions, where economic risk is higher, in our view. As of June 30, 2012, 89% of the bank's loans are to entities based in Hong Kong.

SCBHK maintains a strong customer deposit franchise in Hong Kong. Despite its recent rapid loan growth, the bank's loans-to-deposits ratio is still below the industry average. SCBHK's liquidity is "strong" in view of its rich pool of liquid assets.

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 Capital Methodology And Assumptions, Dec. 6, 2010

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