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TEXT-Fitch affirms Bank of China (Hong Kong) at 'A'/stable
October 31, 2012 / 8:32 AM / in 5 years

TEXT-Fitch affirms Bank of China (Hong Kong) at 'A'/stable

(The following statement was released by the rating agency)

Oct 31 - Fitch Ratings has affirmed Bank of China (Hong Kong) Limited’s (BOCHK) Long-Term Issuer Default Rating (IDR) at ‘A’ with Stable Outlook. The agency has also affirmed the bank’s Viability Rating at ‘a’, its Support Rating at ‘1’ and its Support Rating Floor at ‘A-'. A full list of rating actions is provided at the end of this rating action commentary.

The affirmation of BOCHK’s IDRs, which reflect its intrinsic financial strength as indicated by the VR, is underpinned by the bank’s strong franchise, very strong capitalisation, low risk appetite, sound asset quality and strong liquidity. Potential pressures could arise from growing exposure to China and continued intense competition in Hong Kong.

The Support Rating of ‘1’ reflects an extremely high probability of support, in case of need, from parent Bank of China (BOC; ‘A’/Stable; 66% ownership), and, ultimately, the Chinese government, despite that China’s capital controls could affect the timeliness of support. This is based on Fitch’s view that BOCHK is a core subsidiary of BOC.

The Support Rating Floor of ‘A-’ reflects Fitch’s view that the Hong Kong authorities would also provide support, in case of need. This is because BOCHK is systemically important to Hong Kong (‘AA+'/Stable) and also because BOC is classified by the Basel committee as a globally systemically important financial institution.

The ratings are constrained by BOCHK’s exposure to China, and by the weaker credit profile of its parent BOC (VR: ‘bb’). Its VR could come under pressure from further integration with the parent, if concentration risks, including exposures to China, were to increase resulting in a weaker credit profile, and if the bank aggressively expands with increasing risk appetite. A downgrade in the VR might not by itself affect the IDRs unless Fitch believes that support from BOC for BOCHK has diminished.

The bank’s capitalisation remained exceptionally strong with a Fitch Core Capital (FCC) ratio of 19.3% at end-H112. Fitch expects BOCHK to maintain Basel 3 ratios above those of peers due to lower capital deductions for associates and stronger newly eligible revaluation reserves. The bank’s FCC is still solid at 15.3% excluding property revaluation reserves (2011: 14.5%).

Fitch believes that BOCHK’s strong loan quality is unsustainable as its exposure to China (H112: 37% of assets) is likely to grow faster than that of the banking sector (H112: about 26%). Losses from property loans should be contained given low loan-to-value ratios.

The rating actions of BOCHK are as follows:

- Long-Term IDR affirmed at ‘A’; Outlook Stable

- Short-Term IDR affirmed at ‘F1’

- Viability Rating affirmed at ‘a’

- Support Rating affirmed at ‘1’

- Support Rating Floor affirmed at ‘A-’

- Senior unsecured securities affirmed at ‘A’

- Lower tier-2 subordinated debt affirmed at ‘A-'

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