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July 12 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has affirmed Macao-based Tai Fung Bank’s (TFB) and Banco Weng Hang’s (BWH) 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-'. A full rating breakdown is provided at the end of this rating action commentary.
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). This is because BOC’s strong ability to provide support as indicated by its sovereign support-driven IDR.
TFB’s IDRs are notched down twice from BOC’s IDRs to reflect Fitch’s view of the latter’s limited importance to the Chinese parent. Fitch believes that reputational risk from a default of TFB, one of Fitch’s defining characteristics when assessing the propensity for parental support, would be manageable for BOC.
As Macau’s oldest bank TFB benefits from established market recognition, which provides a strong retail customer base. However, complementary benefits for BOC are small.
TFB has strengthened its integration with BOC with an introduction of shared IT system in 2012. Business strategies and risk management are aligned with BOC but TFB maintains autonomy over its businesses with Macao residents.
BWH’s IDRs are aligned with its parent Wing Hang Bank Limited’s (WHB, A-/Stable). These, together with its Support Rating of ‘1’ reflect the former’s strong strategic importance to and integration with WHB. As the core operating entity of WHB, Fitch considers the probability of extraordinary institutional support for BWH from the ultimate parent to be extremely high if required.
BWH is key to WHB’s strategy of growing Macao as a core market, although the former’s market share remains limited (2012: 3% of total assets). BWH is also likely to remain a stable profit contributor to WHB (15% of operating profit in 2012), BWH is WHB’s second-largest subsidiary (2012: 13% of group’s assets) after Wing Hang Bank (China)’s (WHBC).
BWH’s business strategies, risk management and IT system are well integrated with WHB‘s. BWH maintains operational independence and reports to the parent monthly for material developments such as lending policy exceptions and budget variances.
Fitch does not assign Viability Rating to the bank as its intrinsic credit strength is subject to operational and financial integration with WHB.
TFB’s and BWH’s IDRs and Support Ratings are sensitive to any changes in their parents’ ratings or their propensity to extend extraordinary support.
TFB’s VR reflects the bank’s satisfactory balance sheet strength, complemented by operational support from BOC. It remains constrained by its small size (2012: 7% of system assets), by its concentration to the real estate sector and by Macao’s small and volatile economy.
The bank remains vulnerable to Macao’s volatile property market, given that residential mortgages and commercial property lending accounted for 16% and 17% of total assets at end-2012. TFB’s Fitch Core Capital ratio (FCC), Fitch’s primary measure of bank capitalisation, was the lowest among rated peers in Macao at 11% in 2012 if large revaluation gains on properties were excluded.
Nevertheless, the FCC ratio is likely to remain adequate under Fitch’s stress scenarios due to large general reserves, high collateral coverage and moderate loan-to-value ratios around 60%.
TFB’s mainland exposures, which amounted to 23% of total assets at end-2012, were mainly claims on Chinese banks, including its parent. This compares with 30% for ICBC Macau and 8% for BWH. Non-bank exposures, which amounted to 9% of total assets, were essentially lending to subsidiaries of Hong Kong conglomerates and to Macao residents purchasing properties in China. The former is likely to be a key growth driver, even though BOC encourages TFB to increase its overall China-related activities. Bank exposures are mostly to large state-owned banks in mainland including BOC.
Adverse changes to risk-mitigation policies - general reserves, collateral and LTVs - and inadequate risk-adjusted pricing would exert negative pressure on the bank’s loss absorbing ability. Significant pressure on asset quality from a sudden and rapid correction in the property price, material slowdown in Macao’s tourism industry and higher single name concentration would be negative for the VR.
The rating actions are as follows:
- Long-Term IDR affirmed at ‘BBB+'; Outlook Stable
- Short-Term IDR affirmed at ‘F2’
- Viability Rating affirmed at ‘bbb-’
- Support Rating affirmed at ‘2’
Banco Weng Hang
- Long-Term IDR affirmed at ‘A-'; Outlook Stable
- Short-Term IDR affirmed at ‘F2’
- Support Rating affirmed at ‘1’