May 13, 2016 / 10:26 AM / in 3 years

Fitch Affirms 9 Hong Kong Banks; Outlook Stable

(The following statement was released by the rating agency) HONG KONG, May 13 (Fitch) Fitch Ratings has today affirmed the Long-Term Issuer Default Ratings (IDR) of nine Hong Kong banks: - Hang Seng Bank Limited (HSB) and OCBC Wing Hang Bank Ltd (WHB) at 'A+' - Bank of China (Hong Kong) Ltd (BOCHK), Industrial and Commercial Bank of China (Asia) Ltd (ICBC Asia) and China Construction Bank (Asia) Corporation Limited (CCB Asia) at 'A' - Shanghai Commercial Bank Ltd (SCB) at 'A-' - Dah Sing Bank (DSB) at 'BBB+' - China CITIC Bank International Limited (CNCBI) and Chong Hing Bank Limited (CHB) at 'BBB' The Outlooks for the ratings are Stable. A full list of rating actions is at the end of this rating action commentary. The affirmations and Stable Outlooks reflect Fitch's view that these banks will maintain sufficient financial flexibility relative to their current ratings to navigate the more difficult conditions and mitigate high concentration in the domestic property market and mainland China amid an increasingly challenging macroeconomic environment. The IDRs on WHB, ICBC Asia and CCB Asia continue to reflect our view of an extremely high probability that they would receive timely parental support, if required. Their Stable Outlooks mirror that of their parents. The ratings actions follow a periodic review of the Hong Kong banks (see <a href="https://www.fitchratings.com/site/fitch-home/re/881656">Ho ng Kong Banks 2015 Report Card which is also released today). Ratings remain supported by low credit costs, small impaired loan ratios, moderating loans growth, satisfactory profitability and adequate capitalisation at end-2015 while banks remain subject to tight supervision by the Hong Kong Monetary Authority (HKMA), in particular on domestic mortgages. Mainland China exposures (MCE), amounting to USD759bn or 27.3% of system-assets at end-2015 (2014: USD890bn, 32.8%), have held up well and their rapid rise until 2014 is a reminder of Hong Kong banks' upside growth potential given their proximity to the Mainland. Fitch has changed the Sector Outlook to Negative. This reflects cyclical headwinds for Hong Kong's small, open economy given the increasing integration of Hong Kong's and China's economies and their banking systems, as well as the banks' material direct and indirect exposure to China. The banking sector's profitability has weakened and we expect further challenges due to significantly weaker forecasts for GDP growth, sluggish loans growth and lower return expectations on deploying excess liquidity. We expect credit costs to continue to rise and maintain our forecast of a 1% NPL ratio for the total book, including mortgages, and the NPL ratio of 1.5%-2% for the China-related business in 2016 (2015: 0.70% and 0.78%, respectively). We also have assigned a negative trend on our 'a+' operating environment assessment for Hong Kong banks because the economic environment may be worse than expected due to greater cyclical volatility. The Hong Kong banks' risk profiles have evolved, with their exposure to China much larger than in the last downturn. Fitch expects this trend to continue over the long term. The agency views these exposures as higher risk compared with Hong Kong-based exposures, which require banks to maintain greater absorption buffers, in our view. This and the challenges to the regulatory oversight of the system put downward pressure on the operating environment assessment for Hong Kong-based banks. However, the banks' rating Outlooks remain stable as they maintain financial profiles in line with their ratings. The banks' customer niches and strategies of their parents can drive significant differences in the composition and pace of growth of their China portfolios, and the extent of shifts from shorter-term bank placements and trade-related lending to longer-term onshore activities targeting mainland commercial and individual borrowers. We expect banks to focus less on market share gains and more on risk-adjusted profitability. Subsidiaries of Chinese banks will continue to expand strongly due to customer referrals from parents. This could entail greater risk even though the subsidiaries are required to perform their own due diligence. HKMA undertakes regular onsite examinations of the banks' China-related activities, but we believe that oversight may be more challenging than for domestic exposures, especially mortgages. Hong Kong and China have Fitch Macro-Prudential Risk Indicator scores of 3, which signal potential for buildup of a relatively high degree of systemic risk (see <a href=" here">Macro-Pr udential Risk Monitor - May 2016 ). These risks could materialise as Hong Kong's exports and imports are contracting at their sharpest rate since 2009, while visitor arrivals have plummeted led by a 17.2% drop in arrivals from China. Hong Kong banks' Mainland China-related lending to non-bank borrowers rose just 3.2% in 2015 (2014: 23.1%) because of a sharp decline in trade-related lending (-22.4%). Fitch forecasts Hong Kong's real GDP growth to decelerate to 1.6% this year (2017 forecast: 1.7%, 2015: 2.6%). Market and liquidity risk is elevated with banks being exposed to volatility in the Chinese yuan and related interest rates as well as potential changes in Chinese regulations. KEY RATING DRIVERS IDRS, VIABILITY RATINGS (VRS) AND SENIOR DEBT Hang Seng Bank HSB's ratings capture its strong and balanced intrinsic profile. We upgraded our management and strategy assessment based on HSB's thoughtful strategic positioning, maintenance of its vigilant financial profile and operational support from being part of HSBC Holdings plc (AA-/Stable), which is evident from the aligned risk procedures and secondment of management. HSB has lowered its growth goals in response to the economic slowdown. In 2015, the bank's loan book grew by only 5%, which was in line with the banking system's growth but was below the double-digit rates in past years. The bank's corporate MCE remains largely unchanged from year ago. HSB remains the most exposed to the domestic property market among peers as property loans, including residential mortgage and commercial loans, account for about a quarter of the bank's assets. Loan quality remains solid with an overall NPL ratio of 0.4% at end-2015. HSB's Fitch Core Capital (FCC) ratio adjusted for HKD16.8bn of property revaluation reserves was solid at 15.1% at end-2015. Fitch expects this to remain a rating strength in the near to medium term as management has opted to maintain the strong capital ratio to retain flexibility amid the regulatory and economic uncertainties. The agency has also affirmed HSB's Short-Term IDR at 'F1+' to reflect the strength of its liquidity and funding profile, which are underpinned by the bank's stable retail deposit base and potential funding support from its parent. Its reported loan-to-deposit ratio of 70% and liquidity coverage ratio of 195% at end-2015 are solid compared with peers'. The bank maintains a sizable security portfolio, which buffers it against potential refinancing risk. OCBC Wing Hang Bank The affirmation of WHB's ratings reflect Fitch's view that the ability and propensity of its parent Oversea Chinese Banking Corp (OCBC; AA-/Stable) to support the bank remain unchanged. WHB's VR of 'a-' captures the bank's solid loss absorption buffers, stable asset quality and good intrinsic strength. We expect the bank to continue to maintain tight underwriting standards and risk controls to mitigate concentration risks from higher property and China exposures, given its aim to accelerate China-related growth after OCBC acquired WHB in 2014. Operational support from OCBC will steadily increase, in our view. However, it may take longer for WHB to realise tangible benefits to its company profile and financial strength than what we initially expected. Such benefits include the ability to tap the cross-border trade flows of larger corporates by leveraging OCBC's larger franchise, benefits of diversification and economies of scale, and increased cross-selling opportunities in non-loan businesses. Bank of China (Hong Kong) The affirmation of BOCHK's IDRs and VR reflects the bank's strong market position in Hong Kong and solid capitalisation. Its concentration in China (2015: 41% of assets) and integration with the parent in terms of management and strategy are higher than the sector average, which counterbalance what Fitch views as a solid financial profile. Our assessment of BOCHK's risk appetite remains in line with the bank's intrinsic profile and is of high importance to the VR. Its financial indicators remain sound. The impaired loan ratio is stable and low at 0.23%, operating profitability is steady at 2.96% of risk-weighted assets (RWA), FCC ratio is high at 19.6% and structural liquidity is strong, as indicated by a loan-to-deposit ratio of 65.4%. The planned acquisition of its parent Bank of China's (BOC; A/Stable) south-east Asia operations could support BOCHK's businesses and geographical diversification. However, there are not enough details yet for us to assess the impact. BOCHK's senior unsecured securities are rated in line with its IDRs as they represent direct, unconditional, unsubordinated and unsecured obligations of the bank. Shanghai Commercial Bank Fitch has affirmed SCB's IDRs and VR to reflect the bank's good intrinsic profile, conservative risk appetite and sound capitalisation. The bank continues to maintain prudent underwriting standard with high collateral coverage ratio of 87% at end-2015 and relatively low appetite for China-related lending. Its FCC ratio compared well with that of peers at 15.1%. High reliance on collateral-based lending and a fall in market rates have impacted the bank's profitability, due to its large interbank assets and securities investment portfolio (47% of assets). However, the bank's profitability still appears solid given its conservative risk profile compared to peers. Dah Sing Bank The affirmation of DSB's IDRs and VR reflects the bank's adequate intrinsic strength, measured risk appetite and adequate loss absorption buffers. The bank's risk appetite has remained low amid the pressure on its loan quality and slowing operating environment, which we expect to continue to translate into a higher impaired loan ratio (2015: 0.7%; 2014: 0.3%). The bank's FCC ratio increased to 16.5% at end-2015 (2014: 13.8%) due to steady internal capital generation. However, DSB's minority stake in Bank of Chongqing continues to weigh on our capital assessment. China CITIC Bank International CNCBI's IDRs and VR reflect its adequate financial strength, although it has rising concentration in China, which continues to render the bank's asset quality more vulnerable compared with peers'. The related risks are balanced by improving loss-absorption buffers, in particular capitalisation, with the FCC ratio rising to 12.8% following a HKD1.8bn injection by its parent in 1Q16. We expect it to increase by another 50bp following the sale of its China subsidiary, which should be completed in 2H16. Liquidity remains healthy. CNCBI maintains autonomy in its risk management and day-to-day operations. Impairment charges relating to unexpected loan deterioration of some borrowers and non-loan businesses underscore the bank's vulnerability towards the weakening operating environment. Our assessment of the bank's company profile and what we view as a potentially increasing risk appetite, remain of high importance to the ratings. CNCBI's senior unsecured securities are rated in line with its IDRs as they represent direct, unconditional, unsubordinated and unsecured obligations of the bank. Chong Hing Bank Fitch has affirmed CHB's IDRs and VR to reflect the bank's adequate financial strength. The rating captures what Fitch views as an increased risk appetite expressed through above-sector growth. Referrals from its 75% parent Yue Xiu Group have widened the counterparty scope, increased concentration risk and lifted the bank's mainland China exposure to 40.5% of assets at end-2015 (2014: 44.3%, 2013: 31.7%). We lowered our company profile and asset quality assessments accordingly. Low cost efficiency and below-peers' contribution from the non-loan business will continue to weigh on overall profitability, even though its growing China-related lending has increased profit. Funding and liquidity remain a ratings strength and capitalisation is satisfactory relative to assumed risks with a FCC ratio of 14.4% at end-2015 (2014: 11.2%). Industrial and Commercial Bank of China (Asia) ICBC Asia's IDRs are institutional-support driven given the bank's key role in parent Industrial and Commercial Bank of China's (ICBC; A/Stable) aspiration to provide cross-border financial services to Chinese state-owned enterprises going global. The bank set up a new Asia-Pacific business development department in January 2016 to capture business opportunities in Asia, underscoring its growing importance in coordinating management among ICBC's overseas operations. ICBC Asia and ICBC have jointly set up an integrated system to provide financial services to meet customers' cross-border financing needs, in particular yuan-related products, to take advantage of ICBC's global reach. The support is also manifested in ICBC's injection of USD1.65bn in common equity into ICBC Asia in 2015. ICBC Asia's commercial paper programme is rated in line with its Short-Term IDR as the notes represent direct, unconditional, unsubordinated and unsecured obligations of the bank. China Construction Bank (Asia) CCB Asia's IDRs reflect the bank's important role in facilitating China Construction Bank Corporation's (CCB; A/Stable) overseas expansion, centralising CCB's overseas operations and funding management and the approval processes in Asia-Pacific region. CCB Asia cooperates strongly with CCB's overseas investment banking arm to underwrite Chinese state-owned entereprises' bond issuances. Meanwhile, CCB Asia will integrate with CCB's core banking system in 2H16, which will facilitate customer due diligence, product cross-selling and credit approval process. CCB Asia's senior unsecured securities are rated in line with its IDRs as they represent direct, unconditional, unsubordinated and unsecured obligations of the bank. We do not assign VRs to ICBC Asia and CCB Asia given their strong integration with their parents. SUPPORT RATINGS (SRS) and SUPPORT RATING FLOORS (SRFS) HSB's '1' SR rating reflects institutional support from its 62% owner The Hongkong and Shanghai Banking Corporation Limited (HKSB; AA-/Stable), which provides a floor to HSB's IDRs at one notch below HKSB's. Classifying HSB as strategically important to HKSB reflects the two entities' complementary businesses, HSB's level of integration, high reputational risk to HKSB from a default by its subsidiary, and the size of HKSB's ownership and different branding. Fitch classifies WHB as a strategically important subsidiary of OCBC. The SR of '1' reflects its contribution to the parent's Greater China strategy. Fitch maintains a one-notch difference in the IDRs of WHB and OCBC as deeper integration through business referrals, sharing of treasury and risk management practices and stronger synergies between the two banks' Greater China businesses will likely only evolve over the longer term. BOCHK's SR of '1' reflects our opinion that BOCHK is a core subsidiary to BOC. It has a very strong propensity to support BOCHK and would be able to do so, as indicated by its rating and the relative sizes of the two entities. Our view that the parent's propensity to support is very strong is based on the integral role that BOCHK plays in BOC, which is evident from the shared brand identity, strategic importance of the subsidiary, strong profit contribution by BOCHK and complementary international operations. Fitch classifies CNCBI as a core subsidiary of China CITIC Bank (CNCB; BBB/Stable) as CNCBI serves as an important platform for CNCB's overseas expansion strategy. CNCB increased its stake in CNCBI to 100% in August 2015 from 70.3%. Its SR of '2' also captures CNCB's ability to support CNCBI. The '1' SRs of ICBC Asia and CCB Asia reflect Fitch's expectation that support from the Chinese sovereign (A+/Stable) would be passed to the banks through their respective parents, given their core importance to their parents, if needed. The SR of '5' and SRF of 'No Floor' for SCB, DSB and CHB reflect our view that senior creditors cannot rely on extraordinary sovereign support as Hong Kong will ratify and implement its bank resolution framework in 2016. SUBORDINATED DEBT (WHB, BOCHK, ICBC Asia, CCB Asia, DSB, CNCBI, CHB) Fitch uses the support-driven IDRs as the anchor ratings for the subordinated debts issued by WHB, ICBC Asia, BOCHK, CCB Asia and CNCBI, reflecting Fitch's expectation that in the absence of their own financial strength, institutional support from their respective parents would flow through to the subordinated debt. DSB's and CHB's subordinated debt is notched from their VRs. ICBC Asia's subordinated debt with non-viability clauses are rated two notches below the IDRs as the instruments will be written-down in full at the point of non-viability and the amount (once written-off) will not be restored. CCB Asia, DSB and CNCBI's subordinated notes with non-viability clauses are rated one notch below their respective IDRs to reflect their below-average recovery prospects because they are subordinated to senior unsecured instruments, and to take into account their partial write-down features. The subordinated debt of BOCHK, ICBC Asia, DSB, CNCBI and CHB, all without non-viability clauses, are rated one notch below their respective IDRs, to reflect the notes' higher loss severity and below-average recovery prospects given their subordination to senior unsecured instruments. Fitch rates WHB's perpetual junior subordinated debt without non-viability clauses three notches from its IDRs - two notches for higher non-performance risk given its interest deferral features and one notch for below-average loss severity. The ratings of DSB's perpetual junior subordinated debt are notched three levels from the IDR - two notches for greater non-performance risk given its interest deferral features and one notch for below-average loss severity. RATING SENSITIVITIES IDRS, VIABILITY RATINGS (VRS) AND SENIOR DEBT The VRs of all banks in this peer group are sensitive to changes in banks' risk appetites, especially for their China exposures in the absence of mitigating measures. A change in the composition of China-related activities without stringent risk controls, stable funding and adequate capitalisation could trigger downgrades in those banks' ratings. VRs for banks with below-peer profitability over a sustained period of time could come under pressure. Maintenance of stable asset quality, sufficient capitalisation and healthy liquidity are the key variables that keep the ratings at the current level. The negative trend on our operating environment assessment, currently at 'a+', limits the upgrade potential for banks in this peer group, in particular for HSB's given its high VR. HSB's Short-Term IDR could be downgraded if Fitch was to view liquidity support from HKSB as less likely. A downgrade in WHB's and BOCHK's VRs would only trigger a downgrade of their IDRs if their parent's IDRs or their propensity to support their subsidiaries were also to weaken. The ratings on the senior debt of BOCHK, ICBC Asia, CCB Asia and WHB are sensitive to the same considerations as they are aligned with the IDR. WHB's VR would benefit from greater operational support from its parent if that led to a stronger franchise, competitive advantages and more diverse and stable business model. Fitch could consider equalising WHB's with OCBC's IDR upon stronger integration. The IDRs on ICBC Asia and CCB Asia are sensitive to changes to their respective parents' propensity and ability to provide support, which ultimately ties back to the Chinese sovereign. SUPPORT RATINGS (SRS) and SUPPORT RATING FLOORS (SRFS) The SRs of ICBC Asia, CCB Asia, BOCHK and CNCBI could change if Fitch were to reassess the ability and propensity of their respective parents - and in turn the Chinese sovereign - to provide support. WHB's and HSB's SRs could change if Fitch were to reassess the ability and propensity of OCBC and HKSB, respectively, to support their subsidiaries. We do not expect a change to our sovereign support assessment for SCB, DSB and CHB. A reinstatement and an upward revision of the SRFs would be contingent on a positive change in the sovereign's propensity to support its banks. While not impossible, this is highly unlikely in Fitch's view. SUBORDINATED DEBT The ratings on the subordinated debt of WHB, BOCHK, ICBC Asia, CCB Asia and CNCBI are primarily sensitive to a change in the banks' IDRs, while the ratings on similar debt of DSB and CHB are primarily sensitive to a change in the banks' VRs. The rating actions are as follows: Hang Seng Bank Limited Long-Term IDR affirmed at 'A+'; Outlook Stable Short-Term IDR affirmed at 'F1+' Viability Rating affirmed at 'a+' Support Rating affirmed at '1' OCBC Wing Hang Bank Ltd Long-Term Foreign-Currency IDR affirmed at 'A+'; Outlook Stable Long-Term Local-Currency IDR affirmed at 'A+'; Outlook Stable Short-Term IDR affirmed at 'F1' Viability Rating affirmed at 'a-' Support Rating affirmed at '1' Perpetual junior subordinated notes affirmed at 'BBB+' Bank of China (Hong Kong) Ltd Long-Term IDR affirmed at 'A'; Outlook Stable Short-Term IDR affirmed at 'F1' Viability Rating affirmed at 'a' Support Rating affirmed at '1' Senior unsecured securities affirmed at 'A' Lower Tier-2 subordinated debt affirmed at 'A-' Industrial and Commercial Bank of China (Asia) Ltd Long-Term IDR affirmed at 'A' Outlook Stable Short-Term IDR affirmed at 'F1' Support Rating affirmed at '1' Commercial paper programme affirmed at 'F1' Subordinated notes without non-viability clauses affirmed at 'A-' Subordinated notes with non-viability clauses affirmed at 'BBB+' China Construction Bank (Asia) Corporation Limited Long-Term IDR affirmed at 'A'; Outlook Stable Short-Term IDR affirmed at 'F1' Support Rating affirmed at '1' Senior unsecured securities affirmed at 'A' MTN programme affirmed at 'A/F1' Subordinated notes with non-viability clauses affirmed at 'A-' Shanghai Commercial Bank Ltd Long-Term IDR affirmed at 'A-'; Outlook Stable Short-Term IDR affirmed at 'F2' Viability Rating affirmed at 'a-' Support Rating affirmed at '5' Support Rating Floor affirmed at 'No Floor' Dah Sing Bank Long-Term IDR affirmed at 'BBB+'; Outlook Stable Short-Term IDR affirmed at 'F2' Viability Rating affirmed at 'bbb+' Support Rating affirmed at '5' Support Rating Floor affirmed at 'No Floor' 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+' China CITIC Bank International Limited Long-Term IDR affirmed at 'BBB'; Outlook Stable Short-Term 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-' Chong Hing Bank Limited Long-Term IDR affirmed at 'BBB'; Outlook Stable Short-Term IDR affirmed at 'F3' Viability Rating affirmed at 'bbb' Support Rating affirmed at '5' Support Rating Floor affirmed at 'No Floor' Lower Tier-2 subordinated debt without non-viability clauses affirmed at 'BBB-' Contact: Primary Analyst Sabine Bauer (HSB, WHB) Senior Director +852 2263 9966 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central Hong Kong Ivan Lin, CFA (BOCHK, ICBC Asia, CCB Asia, SCB, DSB, CNCBI, CHB) Associate Director +852 2263 9984 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central Hong Kong Secondary Analyst Sabine Bauer (BOCHK) Senior Director +852 2263 9966 Ivan Lin, CFA (HSB, WHB) Associate Director +852 2263 9984 Shanice Lu (ICBC Asia, CCB Asia, SCB, DSB, CNCBI, CHB) Analyst +852 2263 9924 Committee Chairperson Mark Young Managing Director +65 6796 7229 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Exposure Draft: Global Bank Rating Criteria (pub. 14 Apr 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1004444 Solicitation Status here Endorsement Policy here ail=31 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 WEBSITE '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. 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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