RPT-Fitch Rates Dah Sing Bank's USD Basel III Subordinated Notes 'BBB(EXP)'
(Repeat for additional subscribers)
Jan 17 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has assigned Hong Kong-based Dah Sing Bank's (DSB; BBB+/Stable) proposed Basel III-compliant Tier 2 dated subordinated notes an expected 'BBB(EXP)' rating.
The direct, unsecured and subordinated obligations will be denominated in US dollars and will be issued under DSB's USD2bn medium-term note programme. DSB expects the issue to be about USD200mn in size, and it will use the proceeds to absorb the impact of regulatory phase-out of the existing subordinated debt and manage its capitalisation for future business growth. The notes will be callable by DSB after five years.
The notes include a non-viability clause and will qualify as Tier 2 capital for the bank under the Banking (Capital) Rules of Hong Kong upon approval from the Hong Kong Monetary Authority (HKMA).
The final rating is contingent on the receipt of the final documents conforming to information already received.
KEY RATING DRIVERS
Fitch rates the notes one notch below DSB's Viability Rating (VR) of 'bbb+'. This is to reflect their below-average recovery prospects relative to senior unsecured instruments given their subordination and their partial write-down feature. The notes could be written down in full or in part if the HKMA considers this step necessary to maintain the bank's viability (that is, at the point of non-viability).
The notes have been notched from the bank's VR (the anchor rating) as the bank's credit profile is driven by its standalone financial strength. The agency believes no additional notching from the VR for non-performance is required to capture the point of non-viability as it is broadly the same as that expressed in the VR.
DSB's total regulatory capital ratio was 14.2% at end-June 2013. The new issue is likely to increase the capital ratio by about 1.4pp. This will support the bank's asset growth and also absorb the regulatory phase-out of Tier 2 capital instruments without non-viability clauses (0.3pp per annum) up to the first call of two existing Tier 2 instruments. The legacy perpetual junior subordinated debt and one of the two lower Tier 2 subordinated debt issues - totalling about USD230m (1.6% of risk-weighted assets at end-June 2013) - are callable by DSB in February 2017.
Under Fitch's methodology the instrument would not qualify for any equity credit.
Any changes to DSB's VR would impact the issue's rating. The VR is sensitive to Fitch's assessment of risk appetite and underwriting standards. The rating would be downgraded if the bank expands the potentially riskier Chinese exposure or increases the concentration in unsecured personal lending and commercial property without balancing the higher risk by adequate profitability, capital and liquidity.
An upgrade for the VR is unlikely given the lack of pricing power, the portfolio concentration and high reliance on equity-accounted profits from Bank of Chongqing.
The other ratings of DSB are unaffected and are as follows:
Long-Term Foreign Currency Issuer Default Rating (IDR): 'BBB+'; Outlook Stable
Short-Term Foreign Currency IDR: 'F2'
Viability Rating: 'bbb+'
Support Rating: '3'
Support Rating Floor: 'BB'
Senior unsecured debt: 'BBB+'
Lower Tier 2 subordinated debt without non-viability clauses: 'BBB'
Perpetual junior subordinated debt without non-viability clauses: 'BB+'
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