May 11, 2017 / 11:47 AM / 3 years ago

Fitch Affirms Hang Seng Bank and CCB Asia; Outlook Stable

(The following statement was released by the rating agency) HONG KONG, May 11 (Fitch) Fitch Ratings has affirmed Hang Seng Bank Limited's (HSB) Long-Term Issuer Default Rating (IDRs) at 'A+' with a Stable Outlook. The agency has also affirmed China Construction Bank (Asia) Corporation Limited's (CCB Asia) Long-Term IDR at 'A' with a Stable Outlook. A full list of rating actions is at the end of this rating action commentary. The ratings have been affirmed as part of Fitch's periodic peer review of the Hong Kong banks (see Fitch Affirms 6 Hong Kong Banks; Positive Outlook on OCBC Wing Hang Bank). KEY RATING DRIVERS HSB IDRS, VIABILITY RATING, SUPPORT RATING The affirmation reflects Fitch's expectation that HSB will maintain its strong and balanced intrinsic profile, which benefits from significant domestic market share, strong funding and capitalisation, and operational support from being part of HSBC Holdings plc (AA-/Stable). HSB is more exposed to the property market than its peers. Its domestic property-related lending accounted for half of its loans and a quarter of assets at end-2016, compared with sector averages of 30% and 12%, respectively, at end-1Q17. These figures exclude property loans in mainland China, which we estimate accounted for another 4% of HSB's loans. Mortgages in both jurisdictions are highly regulated with low loan-to-value (LTV) ratios. We expect China to remain the key source of growth. The bank's gross mainland China exposure (MCE) declined to 19% of assets at end-2016 from 22% a year earlier, and the composition of its non-bank exposures has slightly changed as the share of government-related entities declined to 36% from 41%. Most potential for deterioration would likely come from China, as indicated by weaker loan quality in HSB's China subsidiary with an NPL ratio of 1.7% at end-2016 (HSB: 0.5%). The bank has a good track record in its domestic unsecured retail book and its China-related cross-border loans have thus far performed well. HSB's solid capitalisation prepares it well for expected higher and more volatile provisioning requirements under the new IFRS 9 reporting standard and stricter risk-weighted asset rules from the Basel reforms. The bank's Fitch Core Capital ratio is sensitive to changes in property valuations, but it remains sound and at the top end of the range for the banking system at 17.1%, excluding property revaluation reserves. Ample access to retail deposits underpins HSB's stable funding profile. The bank keeps a very liquid balance sheet with customer loans representing only 51% of total assets at end-2016. Its liquidity coverage ratio is among the highest in Hong Kong. This and potential support from its parent underpin HSB's Short-Term IDR of 'F1+'. HSB's '1' Support 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 rating. This 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. CCB Asia IDRS, SENIOR DEBT, SUPPORT RATING Fitch's ratings on CCB Asia reflect our view of an extremely high probability its parent, China Construction Bank Corporation (CCB, A/Stable), will extend the subsidiary timely support, if required. Our rating approach reflects CCB Asia's tight integration and aligned strategy with the parent. CCB Asia is CCB's largest overseas subsidiary, and it facilitates CCB's expansion and manages funding and credit approvals in the Asia-Pacific region. CCB Asia's business strategy, client coverage, management and risk appetite are strongly tied with that of CCB. Fitch does not assign a Viability Rating to CCB Asia given its high integration with the parent. The Stable Outlook reflects the Stable Outlook of CCB and ultimately the Chinese sovereign. CCB Asia's MTN programme is rated in line with its IDRs as the senior unsecured notes under the programme represent direct and unsubordinated debt of the bank. SUBORDINATED DEBT The rating on CCB Asia's Basel III-compliant subordinated debt is notched down once from the bank's IDRs to reflect the notes' partial write-down features. We expect institutional support from CCB will flow through to the notes. RATING SENSITIVITIES HSB IDRS, VIABILITY RATING, SUPPORT RATING The bank's Viability Rating might come under pressure if the bank's asset quality or risk appetite deteriorated significantly. In such a scenario the IDR would, nevertheless, stay unchanged unless our view around HKSB's ability and propensity to support HSB changed. An upgrade is unlikely given HSB's business model and concentration risks. HSB's Short-Term IDR could be downgraded if Fitch was to view liquidity support from HKSB as less likely. HSB's Support Rating could change if Fitch were to reassess the ability and propensity of HKSB to support its subsidiary. CCB Asia IDRS, SENIOR DEBT, SUPPORT RATING The bank's IDRs and ratings on its senior debt are ultimately tied to changes in China's ability and propensity to support CCB. They are also sensitive to a change in Fitch's perception around the propensity of institutional support for CCB Asia, for example if CCB Asia's role within CCB changes. SUBORDINATED DEBT The instrument ratings are sensitive to our assumptions on the anchor rating, the relative loss severity and non-performance of the notes, none of which we expect to change unless our criteria changes. 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' 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' MTN Programme and senior debt under the programme affirmed at 'A' and 'F1' Basel III-compliant subordinated debt affirmed at 'A-' Contact: Primary Analyst Sabine Bauer Senior Director +852 2263 9966 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central Hong Kong Secondary Analyst Jonathan Cornish (HSB) Managing Director +852 2263 9901 Grace Wu (CCB Asia) Senior Director +852 2263 9919 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 Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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