March 1, 2012 / 4:36 PM / 6 years ago

TEXT-Fitch revises Hongkong Shanghai Bank outlook to negative

 (The following statement was released by the rating agency)	
 March 1 - Fitch Ratings has revised The Hongkong and Shanghai Banking
Corporation Limited's (HKSB) Outlook to Negative from Stable and affirmed the
Long-term Issuer Default Rating (IDR) at 'AA'. In addition, Fitch has downgraded
the bank's Viability Rating (VR) to 'aa-' from 'aa'. A full rating breakdown is
provided below.	
	
The change in Outlook follows the same action on HSBC Holdings plc,
HKSB's ultimate 100% parent (see "Fitch Affirms HSBC at 'AA': Outlook Changed to
Negative, dated 1 March 2012). HKSB's IDRs are driven by institutional support
and match those of HSBC. The Outlook change in HSBC is triggered by the
downgrade of HKSB's VR, reflecting the subsidiary's expansion into what Fitch
views as higher-risk markets, including mainland China, and intensifying
competition in its home market and their potential impact on HSBC group.	
	
The drivers behind the downgrade of HKSB's VR are sufficiently diluted at the
HSBC group level at this stage not to have resulted in a downgrade of HSBC
group's Long-term IDR or VR. However, the Negative Outlook indicates a
heightened risk of a one notch downgrade over the medium-term. Besides
challenges emerging at HKSB in a more difficult operating environment, the most
likely cause of a downgrade of HSBC's IDR could be due to revenue or asset
quality pressures emanating from the slowdown in Europe, a setback in the
problematic run-off portfolios in HSBC Finance or a weakening of HSBC Bank plc's
VR (also 'aa-').	
	
"HKSB's dominant market position in Hong Kong is challenged by intense
competition from the Chinese and other strong foreign banks and defending it may
come at a cost," says Sabine Bauer, Director in Fitch's Financial Institutions
team. "Loan demand and fee-generating activities from outside of Hong Kong, in
particular from China, will likely address structural pressure on profitability.
However, increased risk tolerance and rapid expansion into less developed
markets without commensurate increase in capital and profitability could lead to
a downgrade of the Long-term IDR."	
	
Notwithstanding solid results in 2011, net interest margins (NIM) in Hong Kong
are expected to remain under pressure and domestic loan demand subdued. The gap
between NIMs in Hong Kong and the rest of Asia widened but this largely reflects
margin compression in Hong Kong due to competition and the low interest rate
environment. NIMs for the Asian operations outside of Hong Kong stood at 2.1% in
2011 compared with 1.35% for HKSB's unconsolidated domestic operations (average
2001-2010: 2.11% and 2.07%, respectively).	
	
Growing exposure to lower-rated China has increased the bank's dependency on
what Fitch views as a higher-risk market. The agency has regularly highlighted
risks to the Chinese banking system, compounded by under-developed corporate
governance and imperfect risk mitigation. The bank's gross mainland China
exposures (MCEs) more than doubled over the last two years to above USD100bn or
15% of total assets at end-2011 (2009: 9%). This number is Fitch's estimation
based on regulatory reporting of non-bank mainland China exposures and cross
border claims against mainland financial institutions. The figure includes
equity participations and it should be noted that it overstates the exposure as
the two data series double-count for certain items.	
	
Fitch's eligible capital (FEC) ratio fell to 12.9% at end-2011 from 13.6% on
lower unrealised security gains. Total revaluation reserves amounted to 29% of
FEC, with the latter including preference shares as they are held by HSBC group
entities.	
	
HKSB's IDRs benefit from HSBC group's diversification and prudently managed
liquidity. They also factor in HKSB's strong local franchise and track record in
risk management.	
	
HKSB's ratings	
	
Long-term IDR affirmed at 'AA'; Outlook revised to Negative from Stable	
Viability Rating downgraded to 'aa-' from 'aa'	
Short-term IDR affirmed at 'F1+'	
Support Rating affirmed at '1'	
Support Rating Floor affirmed at 'A-'	
	
	
Additional information is available at www.fitchratings.com. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.	
	
Applicable criteria "Global Financial Institutions Rating Criteria", dated 16
August 2011, and "Treatment of Hybrids in Bank Capital Analysis", dated 11 July
2011, are available at www.fitchratings.com.	
	
Applicable Criteria and Related Research:	
Global Financial Institutions Rating Criteria	
Treatment of Hybrids in Bank Capital Analysis	
	
 (New York Ratings Team)	
 

Our Standards:The Thomson Reuters Trust Principles.
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