RPT-Fitch Affirms 5 Small Hong Kong Banks

Tue Feb 18, 2014 3:33am EST

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Feb 18 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings has taken rating actions on five small Hong Kong banks - Dah Sing Bank, Shanghai Commercial Bank Ltd (SCB), Wing Hang Bank Limited, China CITIC Bank International Limited (CNCBI) and DBS Bank (Hong Kong) Limited (DBSHK).

The Issuer Default Ratings (IDRs) of Dah Sing Bank, SCB, Wing Hang Bank and CNCBI are driven by the banks' standalone strength denoted by their respective Viability Ratings (VR). The affirmation of their IDRs with Stable Outlooks reflects Fitch's view that the four banks will maintain adequate financial strength to mitigate potential asset deterioration, including from concentration in China-related assets. In particular, Fitch assesses the banks' liquidity and funding positions as sufficiently robust to withstand volatile fund flows.

DBSHK's IDRs are underpinned by institutional support from its 100% parent DBS Bank Ltd. (DBS; AA-/Stable). The bank's ratings have been affirmed with a Stable Outlook based on the agency's view that ability and propensity of parental support remain unchanged.

A full list of rating actions is at the end of this rating action commentary.

KEY RATING DRIVERS AND SENSITIVITIES - IDRs AND VRs (DAH SING BANK, SCB, WING HANG BANK and CNCBI)

The banks' VRs and, in turn, their IDRs reflect prudent loan growth, which was generally below the system-wide average (2013: 16% yoy). This helped them maintain adequate capital and liquidity. All the banks are focused on cross-border expansion as their lack of scale and pricing power makes it difficult for them to compete in the mature Hong Kong market. The banks have not materially relaxed their risk appetite even though expansion into China is more profitable. New non-bank lending generally finances genuine trade for mainly existing customers and benefits from collateral. Some interbank exposures lack economic purposes, but related risks to Chinese banks are manageable.

CNCBI's brisk growth in gross mainland China exposure (MCE), which is the sum of non-bank China exposure and cross-border claims on Chinese banks, to 52% of total assets, or 6.1x Fitch Core Capital (FCC), at end-1H13 stands out among the peers, with the sector average exposure at 31% of total assets at end-September 2013. The bank's mainland China exposure expanded because it financed its Hong Kong customers' mainland businesses and the offshore operations of Chinese customers referred by China CITIC Bank (CNCB; BBB/Stable), its parent. The bank's business model with heavy concentration on China-related loans is a key constraint for the ratings, although the portfolio appears prudently managed and covered by collateral, guarantees and stand-by letters of credit. Fitch expects the bank to issue new capital to maintain further growth and adequate capital (FCC ratio: 11.9% at end 1H13). CNCBI's high proportion of marketable liquid assets underpins its liquidity position despite rapid loan growth.

Dah Sing Bank's annual loan growth (1H13: 17% including trade bills) has outpaced the system average since 2012 as the bank accelerated cross-border expansion. The growth in MCE to 29% of total assets, or 3.1x of FCC, at end-1H13 (2011: 26%, x2.9, respectively) contributed to improved margin (1H13: 1.3% annualised versus 1H12: 1.1%) due to higher market rates in China and risk premium. However, credit growth is likely to moderate due to the cap on banks' loan-to-deposit ratio at 75% in China and capital constraint brought on by rapid growth. Dah Sing Bank's investments in other financial institutions above the regulatory threshold (i.e. 10% of banks' common equity Tier 1 capital) formed 1.3% of risk-weighted assets at end-1H13. Any unsold amount and investments in legacy hybrid instruments that are not called would also reduce its capital ratios as 20% of these investments above the threshold will start to be deducted from banks' regulatory capital each year from 2014. Dah Sing Bank's FCC ratio would have been 10.8% compared with 12.3% at end 1H13 if all those investments are excluded, although Fitch was informed by the management that the investments were reduced during 2H13. The rapid loan growth raised its loan/deposit ratio to 84% at end 1H13 (2012: 77%), although the bank still maintains adequate cash and other liquid assets (8% of total assets) as liquidity buffer.

SCB remains best capitalised among the peers with FCC ratio of 19.5% at end-1H13, which, together with recurring profit and collateral, underpin its solid loss absorbing capability. Nevertheless, high concentration in interbank exposures of 45% of total assets at end-1H13 - including claims on Chinese banks (18% of total assets) - renders the bank vulnerable to volatility in financial markets. However, adequate cash and marketable securities and its low loan/deposit ratio of 54% at end-1H13 support further growth and its liquidity position.

Wing Hang Bank's MCE fell to 27% of total assets, or 2.9x of FCC, at end 1H13 (2011: 29%, 3.5x) after it focused on growth in Macao (13% of total assets) while maintaining sound capital and liquidity. Wing Hang Bank manages liquidity tightly by limiting credit growth and holding sovereign bonds with high ratings, such as US government bonds. The bank's China concentration risk could increase and weigh on its intrinsic strength if Overseas-Chinese Banking Corp (OCBC; AA-/Stable) were to acquire the bank as a hub for a broader Greater China strategy. OCBC and Wing Hang Bank have extended their exclusive discussions on the potential acquisition until 3 March 2014.

The banks' VRs and IDRs are sensitive to the banks' risk appetite for China expansion because the potentially more risky exposure is not as strictly regulated by the Hong Kong authorities as domestic property-related lending. Aggressive expansion, typically above the sector average, would put pressure on the banks' ratings if the growth is not balanced with higher margins and adequate capital and liquidity. That said, CNCBI's IDR would not fall below 'BBB-' regardless of the level of its VR. This is based on assumed support from CNCB and, ultimately, the Chinese government in light of the state ownership in CNCB.

The small banks' modest franchises and less diversified business models limit the potential for upgrades.

KEY RATING DRIVERS AND SENSITIVITIES- IDRs AND SUPPORT RATING (DBSHK) The ratings of DBSHK reflect Fitch's view of an extremely high probability of support from its parent, if needed. This reflects the core importance of DBSHK to its parent's pan-Asian franchise, DBS's full control/ownership and a high level of integration with its parent. The ratings also take into account DBS's strong ability to extend extraordinary support on a timely basis. Changes to DBS's ratings or its willingness to extend extraordinary support would affect the ratings of DBSHK.

KEY RATING DRIVERS AND SENSITIVITIES - SUPPORT RATINGs AND SUPPORT RATING FLOORs (DAH SING BANK, SCB, WING HANG BANK and CNCBI)

Support Ratings (SR) and Support Rating Floors (SRF) of Dah Sing Bank, SCB and Wing Hang Bank have been affirmed, reflecting the moderate probability of support from the Hong Kong authorities, if needed, due to their limited systemic importance. Nevertheless, the SRs and SRFs face the prospect of being downgraded once Fitch completes its global review of how regulatory initiatives and the introduction of resolution schemes impact the authorities' stance on support.

Even if the SRs and SRFs were downgraded, there would be no impact on their VRs, and by implication, their IDRs.

CNCBI's SR reflects the bank's strategic importance to CNCB given its complementary role in its parent's China activities. CNCB's less than near-full ownership in the bank (70.3%) is the major constraint for the rating. However, positive rating pressure may arise if its importance to and integration with its parent deepens through further business referral and collaboration.

KEY RATING DRIVERS AND SENSITIVITIES- SUBORDINATED DEBT

Subordinated debt issued by Dah Sing Bank, Wing Hang Bank and CNCBI are all notched down from their VRs (the anchor rating) as the banks' credit profiles are driven by their standalone financial strength. Their debt ratings are therefore primarily sensitive to a change in these banks' VRs.

Fitch rates Dah Sing Bank's and CNCBI's lower Tier 2 instruments one notch below their respective VRs to reflect their below-average recovery prospects relative to senior unsecured instruments given their subordination. Fitch also rates CNCBI's and Dah Sing Bank's subordinated debt with non-viability clauses and partial write-down features at the same level as lower Tier 2 instruments. The ratings of Dah Sing Bank's and Wing Hang Bank's perpetual junior subordinated debt are notched three levels from the VRs - two notches for greater non-performance risk given their interest deferral features and one notch for below-average loss severity.

The rating actions are as follows:

Dah Sing Bank

Long-Term Foreign Currency IDR affirmed at 'BBB+'; Outlook Stable

Short-Term Foreign Currency IDR affirmed at 'F2'

Viability Rating affirmed at 'bbb+'

Support Rating affirmed at '3'

Support Rating Floor affirmed at 'BB'

Senior unsecured debt affirmed at 'BBB+'

Lower Tier-2 subordinated debt without non-viability clauses affirmed at 'BBB'

Subordinated notes with non-viability clauses affirmed at 'BBB'

Perpetual junior subordinated debt without non-viability clauses affirmed at 'BB+'

SCB

Long-Term Foreign Currency IDR affirmed at 'A-'; Outlook Stable

Short-Term Foreign Currency IDR affirmed at 'F2'

Viability Rating affirmed at 'a-'

Support Rating affirmed at '3'

Support Rating Floor affirmed at 'BB'

Wing Hang Bank

Long-Term Foreign and Local Currency IDRs affirmed at 'A-'; Outlook Stable

Short-Term Foreign Currency IDR affirmed at 'F2'

Viability Rating affirmed at 'a-'

Support Rating affirmed at '3'

Support Rating Floor affirmed at 'BB'

Perpetual junior subordinated notes without non-viability affirmed to 'BBB-'

CNCBI

Long-Term Foreign Currency IDR affirmed at 'BBB'; Outlook Stable

Short-Term Foreign Currency IDR affirmed at 'F3'

Viability Rating affirmed at 'bbb'

Support Rating affirmed at '2'

Senior unsecured securities affirmed at 'BBB'

Lower Tier-2 subordinated debt without non-viability clauses affirmed at 'BBB-'

Subordinated notes with non-viability clauses affirmed at 'BBB-'

DBSHK

Long-Term Foreign and Local Currency IDRs affirmed at 'AA-'; Outlook Stable

Short-Term Foreign Currency IDR affirmed at 'F1+'

Support Rating affirmed at '1'

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