January 4, 2018 / 4:01 AM / a year ago

Fitch: ICBC Asia D-SIB Status Reflects Chinese Bank Growth in HK

(The following statement was released by the rating agency) HONG KONG, January 03 (Fitch) The Hong Kong Monetary Authority's (HKMA) designation last week of another Chinese bank subsidiary - ICBC Asia - as a domestic systemically important bank (D-SIB) is reflective of Chinese banks' increasing presence in the territory, says Fitch Ratings. Higher capital requirements for Hong Kong's six D-SIBs, which accounted for about half of banking assets at end-1H17, support system stability. Nevertheless, there is a risk that system-wide capitalisation fails to stay commensurate with rising China-related risks. Hong Kong's gross mainland China exposure (MCE) accounts for around one-third of system-wide assets and we expect continued robust growth in 2018. MCE was up by 21% yoy at end-1H17. A significant and rising share of this China-related business is conducted through foreign bank branches - particularly of Chinese banks - which are not subject to minimum capital ratios. Moreover, Hong Kong's counter-cyclical buffer applies only to domestic exposures. The regulator, therefore, faces a challenge in ensuring system-wide capitalisation keeps pace with rising MCE. D-SIB designation could be one way in which the regulator can require banks to hold more capital - even though it would not automatically cover smaller banks with high appetite for mainland exposure. ICBC Asia is the second subsidiary of a Chinese bank, after Bank of China (Hong Kong) (BOCHK), to be added to the D-SIB list. It is possible that the two banks will eventually be joined by China Construction Bank's Hong Kong subsidiary, CCB Asia, which we believe is next in line - albeit with some gap. Indeed, CCB Asia and CCB's Hong Kong branch would already qualify as a D-SIB if combined (see chart). The global regulatory trend points toward combination of subsidiaries and branches into a single presence, although there have been no indications from the Hong Kong authorities that this is being considered. <iframe src="https://e.infogram.com/ac1667c5-e1ea-4dfe-bb5f-907bf30f78d0?src=embed " title="Final D-SIB Scores for Selected Hong Kong Banks" width="523" height="721" scrolling="no" frameborder="0" allowfullscreen="allowfullscreen"> The branches of two other Chinese banks - Bank of Communications (BOCOM) and Agricultural Bank of China (ABC) - are also large. BOCOM's branch is in the process of transferring its retail and private banking operations into its Hong Kong subsidiary, which could become a D-SIB in time. The HKMA's current stance is that foreign branches, which are not subject to capital adequacy requirements, will not be formally designated as D-SIBs. However, the HKMA will consider increasing supervision of branches if they become systemically important and may oblige them to operate through a subsidiary rather than a branch if their potential failure becomes a threat to the economy. ICBC Asia's regulatory capital buffers will increase by 1% from 2019 to reflect its D-SIB status. The bank already comfortably meets the higher capital requirement; its common equity Tier 1 ratio was 12.5% at end-June 2017. Its D-SIB status will also be likely to necessitate the bank to meet new total loss-absorbing capacity requirements, which the HKMA is due to consult on in 1Q18. The HKMA also moved Standard Chartered Bank (Hong Kong) (SCBHK) into a lower bucket, which means its D-SIB buffer will fall to 1.0% from 1.5%. The change might be due to growth in other banks, which could have reduced its relative importance, or could be down to supervisory overlay. Our calculations show it still ranks above other banks in the lowest bucket - Bank of East Asia (BEA) and ICBC Asia. Contact: Sabine Bauer Senior Director Financial Institutions +852 2263 9966 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central Hong Kong Veronica Lau Director Financial Institutions +852 2263 9924 Dan Martin Senior Analyst Fitch Wire +65 6796 7232 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. Additional information is available on www.fitchratings.com The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE here. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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