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June 24 (The following statement was released by the rating agency)
Fitch Ratings has affirmed Macao-based Tai Fung Bank's (TFB) and Industrial and Commercial Bank of China (Macau) Limited's (ICBC Macau) Long-Term Issuer Default Ratings (IDR) at 'BBB+' and 'A' respectively. The Outlooks are Stable. At the same time, TFB's Viability Rating (VR) was also affirmed at 'bbb-'.
Fitch maintained Rating Watch Positive (RWP) on Banco Weng Hang's (BWH) Long-Term IDR of 'A-' and Short-Term IDR of 'F2'. The IDRs of BWH and its 100% parent Wing Hang Bank Limited (WHB; A-/RWP) were placed on RWP on 2 April 2014, when Singapore's Oversea-Chinese Banking Corp (OCBC; AA-/Rating Watch Negative) announced an acquisition of a majority stake in WHB. Successful completion of the acquisition, which is subject to the approval of banking regulators in Singapore, Hong Kong and Macao, is likely to trigger an upgrade of BWH's IDRs by at least one notch following a similar rating action on WHB's IDRs.
A full rating breakdown is provided at the end of this rating action commentary.
KEY RATING DRIVERS - IDRS AND SUPPORT RATING (TFB)
TFB's IDRs and Support Rating of '2' reflect Fitch's view of a high probability of support from its 50.3% shareholder, Bank of China (BOC; A/Stable). Fitch believes BOC has the ability to provide support to TFB, a relatively small subsidiary (2013: 0.4% of group's assets), as indicated by its sovereign support-driven IDR.
The Long-Term IDR is two notches lower than that of BOC, as Fitch views BOC Macau branch's dominant market position and strong integration with BOC overwhelm the strategic importance of TFB for the BOC group. However, it also reflects TFB's operational integration with BOC through an integrated IT system, as well as a joint ATM and branch network with BOC's Macau branch. Nevertheless, the agency believes that TFB will retain significant autonomy over its businesses with Macao residents. The high autonomy manifests itself in BOC's below-majority representation in the TFB's board (five out of 13).
KEY RATING DRIVERS - IDRS AND SUPPORT RATING (ICBC Macau)
ICBC Macau's IDRs are aligned with its Chinese parent Industrial & Commercial Bank of China (ICBC, A/Stable) reflecting that support from the Chinese government for ICBC if required would extend to ICBC Macau given its core importance to its parent. This takes into account ICBC Macau's role in ICBC's cross-regional franchise and offshore renminbi business, and strong integration with ICBC in management, funding and business generation. The Stable Outlook is also in line with the Outlook on ICBC's IDR.
Fitch expects that ICBC will remain committed to supporting ICBC Macau with liquidity and capital to accommodate its further growth. ICBC subscribed to ICBC Macau's existing outstanding subordinated debt at end-2013. Fitch expects ICBC Macau is likely to issue additional subordinated debt to support further growth.
KEY RATING DRIVERS - IDRS AND SUPPORT RATING (BWH)
BWH's IDRs are aligned with WHB. These, together with its Support Rating of '1', reflect the BWH's core importance to, and close integration with WHB. As the core operating entity of WHB, Fitch considers the probability of parental support for BWH to be extremely high if required.
The RWP on the IDRs reflect Fitch's view that both WHB and BWH will become strategically important subsidiaries of OCBC if the acquisition is completed. Fitch believes BWH would benefit from OCBC's institutional support, given Macao's strategic importance for OCBC's Greater China expansion strategy and BWH's high level of integration with WHB.
BWH is a main pillar supporting WHB's growth across Hong Kong, Macao and China. BWH is well integrated with WHB in business strategies, risk management and IT system.
Fitch believes WHB will provide liquidity and capital support if needed as BWH's loan growth (2013: 20%, yoy) and profit contribution (2013: 14% of the group's operating profit) are vital for WHB.
RATING SENSITIVITIES - IDRS AND SUPPORT RATING (BWH, TFB and ICBC Macau)
All banks' IDRs and Support Ratings are sensitive to any changes to their respective parents' ratings or their propensity or ability to extend extraordinary support in a timely manner.
Completion of the acquisition of WHB by OCBC is likely to trigger an upgrade of BWH's IDRs by at least one notch following a similar rating action on WHB's IDRs.
KEY RATING DRIVERS - VR (TFB)
TFB's VR reflects its adequate financial profile, complemented by operational support from its parent. Risk appetite is considered higher which, when combined with rapid growth, may stretch management and risk controls. Satisfactory profitability driven by volume growth and high general reserve (1% of risk weighted assets) will assist the bank to withstand risk concentrations and volatility in the operating environment.
TFB has an established local franchise with the third largest market share in deposits (2013: 8.6% of the system). Growing deposits have funded rapid credit growth (2013: 27% yoy) driven by an increase in residential mortgages and syndicated loans both in Macao and the mainland. This has placed pressure on capitalisation with Fitch Core Capital (FCC) ratio at 13.6% at end-2013. BOC subscribed to half of TFB's MOP2bn subordinated debt issued in 2013 to support growth, which added 4.4pp to the bank's regulatory capital adequacy ratio (14.9% at end-2013).
RATING SENSITIVITIES - VR (TFB)
TFB's VR is vulnerable to negative rating actions due to Macao's volatile operating environment and persistent pressure on capital due to rapid credit growth. The rating could come under pressure if the bank does not adjust a pace of asset growth to balance with capital generation. Negative rating pressure will also rise if there are increased property concentrations and direct China exposure.
The rating actions are as follows:
Tai Fung 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 '2'
Long-Term foreign currency IDR affirmed at 'A'; Outlook Stable
Short-Term foreign currency IDR affirmed at 'F1'
Support Rating affirmed at '1'
Banco Weng Hang
- Long-Term foreign currency IDR of 'A-'; RWP
- Short-Term foreign currency IDR of 'F2'; RWP
- Support Rating affirmed at '1'