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Fitch Affirms 6 Hong Kong Banks; Positive Outlook on OCBC Wing Hang Bank
May 11, 2017 / 11:32 AM / 7 months ago

Fitch Affirms 6 Hong Kong Banks; Positive Outlook on OCBC Wing Hang Bank

(The following statement was released by the rating agency) HONG KONG, May 11 (Fitch) Fitch Ratings has affirmed the Long-Term Issuer Default Ratings (IDR) of six Hong Kong banks as follows: - OCBC Wing Hang Bank Ltd (WHB) at 'A+', - Bank of China (Hong Kong) Ltd (BOCHK) at 'A', - Shanghai Commercial Bank Ltd (SCB) at 'A-', - Dah Sing Bank (DSB) at 'BBB+', and - China CITIC Bank International Limited (CNCBI) and Chong Hing Bank Limited (CHB) at 'BBB'. Fitch has also revised the Rating Outlook for WHB to Positive from Stable, and upgraded the Short-Term IDR to 'F1+' from 'F1', reflecting the continuous integration of management and operations with its parent Oversea-Chinese Banking Corp (OCBC; AA-/Stable/aa-). The Outlooks on BOCHK, SCB, DSB, CNCBI and CHB are Stable. A full list of rating actions is at the end of this rating action commentary. The rating affirmations reflect Fitch's view that these Hong Kong banks will maintain sufficient financial flexibility relative to their current ratings to mitigate concentration risk to mainland China and the domestic property market, and sustain adequate profitability despite competitive pressure and potentially volatile macro-economic conditions. The rating actions follow Fitch's periodic review of the Hong Kong banks. The ratings of these primarily deposit-funded banks reflect their different risk appetites and franchises. They will continue to be supported by solid liquidity positions and adequate capitalisation. We expect impaired loan ratios and credit costs to continue to rise due to larger contribution from China-related exposures, but their overall levels will remain moderate (2016: 1% or below). Fitch maintains the negative trend on its operating environment assessment for Hong Kong banks, because the structural weaknesses in Hong Kong remain unchanged as we continue to expect closer integration between Hong Kong and China (where the operating environment outlook also remains negative). The banks' mainland China exposures have continued to rise, which render the banks more vulnerable to asset-quality deterioration in mainland China. Fitch expects Hong Kong's annual real GDP growth to be 1.5% in 2017 and 2018. In the shorter term, we do see some positive signs in the domestic economy with real GDP growth accelerating to 3.1% year-on-year in 4Q16 while visitor arrivals increased 8.8% year-on-year in March 2017. Margins should benefit from rising US dollar interest rates and loan growth, which rebounded to 4.6% quarter-on-quarter and 11.6% year-on-year in March 2017. As a result, we have changed our banking system outlook to stable from negative as cyclical pressure is easing. Tight supervision by the Hong Kong Monetary Authority (HKMA) remains an integral mitigating and positive rating factor. Meanwhile, Fitch expects the overall quality of banks' mortgages to remain benign and spillover risks from the property market to be manageable, even in the face of interest-rate increases or a potential correction in house prices. The banks' customer niches and the strategies of their respective parents explain the divergent composition and pace of growth of their China portfolios. We believe that the fastest-growing banks in this peer group (CNCBI: 11% increase in total mainland China exposures (MCE) in 2016, CHB: 7% and BOCHK: 5%) will be those that rely more on business referrals from their Chinese parents. The composition of banks' MCE, while steady at 27% of assets at end-2016, has further tilted to non-bank borrowers, which accounted for 77% of the total at end-2016. Fitch anticipates that the banks will encounter few difficulties in meeting the second wave of the more stringent Basel III rules and implementing the new IFRS 9 reporting standard capital requirements. KEY RATING DRIVERS IDRS, VIABILITY RATINGS (VRS) AND SENIOR DEBT All ratings are currently driven by the banks' intrinsic strength, with the exception of WHB's, which is driven by our view of an extremely high probability of timely parental support. Downside risk on BOCHK and CNCBI is mitigated by institutional support from their parents. OCBC Wing Hang Bank The affirmation of WHB's Long-Term IDR reflects Fitch's view that the ability and propensity of its parent OCBC to support the bank are not likely to diminish. Fitch maintains a one-notch difference in the Long-Term 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 be further enhanced over the next 12 months. We believe that WHB has started realising tangible benefits, including lower funding costs and access to larger customers, by leveraging OCBC's franchise. Its financial profile also benefits from some economies of scale, system and technological supports and increased non-loan businesses, and as a result, we have upgraded the Short-Term IDR to 'F1+' to 'F1' and rating Outlook to Positive from Stable. WHB's VR of 'a-' captures the bank's adequate loss-absorption buffers and satisfactory asset quality. We expect the bank to accelerate China-related lending in line with the parent's strategy while maintaining appropriate risk controls. This is because OCBC's Greater China operations have become centralised in WHB. Fitch does not believe the disposal of WHB's stake in Hong Kong Life Insurance Limited will have an immediate effect on WHB's ratings. The one-off gain of around 106% of the bank's 2016 profit, if retained, will support organic growth and help offset rising credit costs. Bank of China (Hong Kong) The affirmation of BOCHK's IDRs and VR reflects the bank's strong market position in Hong Kong and its strong capitalisation, which provide it sufficient flexibility to acquire Bank of China Ltd.'s (BOC; A/Stable/bb) south-east Asian operations. Its Fitch Core Capital (FCC) ratio stood at 24% at end-2016 (without property reserve: 18.9%) - the highest in the peer group - following completion of the disposal of Nanyang Commercial Bank in May 2016. Operational and strategic linkages to its parent, and above-peer concentration in China exposures (2016: 38% of assets) weigh on the ratings. Our assessment of BOCHK's risk appetite remains in line with the bank's rating and is of high importance to the VR. The bank's financial profile remains consistently sound. Its impaired loan ratio is low at 0.2%, whereas its provision coverage ratio was above peers'. Operating profitability is robust at 3.1% of risk-weighted assets (RWA) and the bank is highly cost efficient. Acquiring BOC's south-east Asian operations will increase BOCHK's geographical diversification, and strengthen BOCHK's competitive position in the Asia-Pacific region. Shanghai Commercial Bank SCB's IDRs and VR reflect the bank's niche franchise and conservative financial profile, which is characterised by strong capitalisation and lower-than-peers' appetite for China-related lending. Loan quality remains benign with high reliance on traditional collateral-based lending (85% of loans), moderate growth ambition and large interbank assets and securities investment portfolio (47% of assets). We expect the bank's profitability to remain steady, supported by low credit costs, its lower cost base and improved margin due to the gradually rising interest rates. The one-off gain from the disposal of its stake in Hong Kong Life of around 57% of the bank's 2016 profit will not have an immediate effect on SCB's ratings as we expect it to support organic growth and help offset rising credit costs. We expect its capital level to remain broadly stable (2016: FCC ratio of 18.8%). Dah Sing Bank DSB's IDRs and VR reflect the bank's local franchise as part of a medium-sized group which the chairman and his family holds a controlling stake, and adequate loss-absorption buffers relative to its focus on personal unsecured lending (13% of loans) and a high proportion of lending to SMEs. Its impaired loan ratio rose to 1.0% in 2016 from 0.7% in 2015 and 0.3% in 2014, mostly due to weaker performance of its SME loan book. The domestic SME sector encountered slower business growth or financial difficulties amid the sluggish operating environment in 2015 and 1H16. DSB's FCC ratio increased to 14.4% at end-2016 (2015: 14%) due to steady internal capital generation, while its regulatory end-point common equity Tier 1 (CET1) ratio was 12.7%. The main difference is that retained profits from at-equity accounted income from DSB's minority stake in Bank of Chongqing do not qualify as regulatory core capital. The concentration risk from this stake continues to weigh on our capital assessment of the bank. China CITIC Bank International CNCBI's IDRs and VR reflect its above-peer average growth and higher concentration risk in China. Its close ties and connectivity with the 100% parent China CITIC Bank Corporation Limited (CNCB; BBB/Stable/b+) boost its franchise and enable it to generate cross-border businesses from its parents' clients. Its greater involvement with Chinese borrowers - CNCBI's planned disposal of its wholly owned subsidiary in China did not proceed in 2016 - and stronger cooperation with its parent could, however, also render it more susceptible to the economic environment on the mainland. Wholesale and cross-border loans represented 76.5% of total loans in 2016, whereas individual and business banking loans accounted for another 23.2%. The bank also has a high concentration in property-related lending. Its impaired loan ratio of 1% at end-2016 (2015: 0.9%) was largely attributed to legacy cases. The ratings also reflect its increasing capitalisation, although its FCC ratio of 12.2% remained below the peers' average (2016: 16.6%). Fitch views the bank's 10.8% CET1 ratio as still broadly in line with its rating. CNCBI's liquidity position remains a rating strength. CNCBI's senior unsecured MTN programme is rated in line with its IDRs as it represents direct, unconditional, unsubordinated and unsecured obligations of the bank. Chong Hing Bank The IDRs and VR of CHB reflect the bank's small domestic franchise and rapid China-related growth through customer referrals from its 75% parent, Yue Xiu Group, which is wholly owned by the Guangzhou State-owned Assets Supervision and Administration Commission. As a result of being the financial arm of a mainland-based conglomerate, CHB's counterparty scope has widened, and its concentration in cross-border lending to the central government (41.7% of total non-bank mainland China exposures (NBMCE) and the Chinese state-owned enterprises' offshore subsidiaries mainly based in Hong Kong (23.8% of total NBMCE)) has increased. The bank's MCE remains high at 40% of assets at end-2016 (2015: 41%). We believe that these loans are fairly concentrated in the property, infrastructure and transportation sectors where Yue Xiu Group has prominent exposure. CHB's profitability will continue to be burdened by its below-peers contribution from non-loan businesses and lower cost efficiency, even though its China-related lending has led to a steady increase in operating profit. The bank remains funded by local retail deposits and capitalisation is satisfactory relative to peers' with an FCC ratio of 13.6% at end-2016 (2015: 14.4%). The one-off gain stemming from the disposal in CHB's stake in Hong Kong Life of around 77% of the bank's 2016 profit, if retained, will support organic growth and help offset rising credit costs. We calculate that it would increase the FCC ratio to about 15%. SUPPORT RATINGS (SRS) and SUPPORT RATING FLOORS (SRFS) The SRs of '1' for WHB and BOCHK and '2' for CNCBI reflect their parents' ability and propensity to support their subsidiaries. BOCHK's SR reflects our opinion that the bank is core to BOC due to its integral role as the largest subsidiary of BOC, and its default would constitute high reputational risk to the parent, particularly as it provides financial infrastructure to Hong Kong as the territory's renminbi clearing bank. Fitch sees CNCBI as core to CNCB as it serves as an important platform for CNCB's overseas expansion strategy. The SR of '5' and SRF of 'No Floor' for SCB, DSB and CHB reflect our view that senior creditors in Hong Kong cannot rely on extraordinary sovereign support as Hong Kong will ratify and implement its bank resolution framework in 2017. SUBORDINATED DEBT (BOCHK, DSB, CNCBI, CHB) Fitch rates the Hong Kong banks' subordinated notes one notch below their respective IDRs to reflect their below-average recovery prospects because they are subordinated to senior unsecured instruments. The issues with non-viability triggers of BOCHK, DSB, CNCBI and CHB are rated one notch down from the banks' IDRs due to their partial write-down features. RATING SENSITIVITIES IDRS, VIABILITY RATINGS (VRS) AND SENIOR DEBT The VRs of all banks in this peer group are sensitive to changes in banks' company profiles and their risk appetites, especially their China exposures in the absence of mitigating measures. Changes in the franchise and business model, the composition of China-related activities without stringent risk controls, the regulation, or the banks' stable funding and adequate capitalisation could trigger downgrades in those banks' ratings. The VRs for banks whose profitability remain below that of peers over a sustained period could come under pressure. Maintenance of stable asset quality, sufficient capitalisation and healthy liquidity are the key variables that would keep the ratings at the current level. A downgrade in the VRs of CNCBI and BOCHK would only trigger a downgrade of their IDRs if their parent's IDRs or their propensity to support their subsidiaries were also to weaken. A downgrade of OCBC's IDR or a decline in its propensity to support WHB could lead to a downgrade of WHB's IDRs; however, Fitch does not consider this to be likely in the near term. 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 expects to equalise WHB's with OCBC's IDR upon stronger integration, which is likely to take another 12 months. The negative trend in our operating environment assessment limits the upgrade potential for the banks in this peer group. SUPPORT RATINGS (SRS) and SUPPORT RATING FLOORS (SRFS) The SRs of WHB, BOCHK and CNCBI could change if Fitch were to reassess the ability and propensity of their respective parents - and in BOCHK's and CNCBI's case the Chinese sovereign - to provide support. However, Fitch does not consider this to be likely. We do not expect a change to our sovereign support assessment. A reinstatement or an upward revision of the SRFs would be contingent on a positive change in Hong Kong's propensity to support its banks. This is highly unlikely in Fitch's view. SUBORDINATED DEBT The ratings on the subordinated debt are primarily sensitive to a change in the banks' IDRs. The rating actions are as follows: OCBC Wing Hang Bank Ltd Long-Term Foreign-Currency IDR affirmed at 'A+'; Outlook revised to Positive from Stable Long-Term Local-Currency IDR affirmed at 'A+'; Outlook revised to Positive from Stable Short-Term IDR upgraded to 'F1+' from 'F1' Viability Rating affirmed at 'a-' Support Rating affirmed at '1' Bank of China (Hong Kong) 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' Subordinated debt without non-viability clauses affirmed at 'A-' Shanghai Commercial Bank Limited 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' Subordinated notes with non-viability clauses affirmed at 'BBB' 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' MTN Programme affirmed at 'BBB' 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' Subordinated debt without non-viability clauses affirmed at 'BBB-' Contact: Primary Analyst Veronica Lau Director +852 2263 9924 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central Hong Kong Secondary Analyst Sabine Bauer Senior Director +852 2263 9966 Committee Chairperson Ambreesh Srivastava Senior Director +65 6796 7218 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: Additional information is available on Applicable Criteria Global Bank Rating Criteria (pub. 25 Nov 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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