Fitch Affirms Five Mid-Sized Hong Kong Banks; Outlook Stable

Dah Sing Banking

19/11/2019 09:42

(The following statement was released by the rating agency)


Fitch Ratings-Hong Kong-November 19: 

Fitch Ratings has affirmed the Long-Term Issuer Default Ratings (IDR) of five 
Hong Kong banks as follows: 

- OCBC Wing Hang Bank Limited (WHB) at 'AA-'

- DBS Bank (Hong Kong) Limited (DBSHK) at 'AA-'

- Shanghai Commercial Bank Limited (SCB) at 'A-'

- Dah Sing Bank, Limited (DSB) at 'BBB+' 

- Chong Hing Bank Limited (CHB) at 'BBB'

The Outlooks are Stable.

The affirmations reflect Fitch's view that the banks have sufficient operating 
buffers to withstand near-term economic headwinds, although performance metrics 
are likely to deteriorate due to ongoing social unrest in Hong Kong and the 
broader regional slowdown in economic growth due to US-China trade tensions. 
That said, we expect the banks' capital and liquidity ratios to remain intact, 
supported by the Hong Kong dollar and US dollar peg as well as adequate system 
liquidity. The authorities' October announcements to support SME sectors and the 
relaxation of measures regarding residential mortgages to boost the economy 
should also ease near-team asset-quality pressure.

Weaker Hong Kong-dollar deposit growth in recent months may pressure net 
interest margins, but profitability should remain steady, since the banks have 
solid buffers and risk mitigation. We expect the sector to see higher 
credit-loss charges under HKFRS9 from the headline contraction in Hong Kong's 
GDP growth and potential rise in unemployment, but this should be balanced by 
tight cost discipline and stringent risk management. The banks' strong capital 
and liquidity buffers also provide some downside cushion against the challenging 
economic conditions and near-term uncertainties in Hong Kong. 

Our assessment of the operating environment at 'a'/stable takes into account the 
increasing interconnectedness between mainland China and Hong Kong. We expect 
rising mainland China exposure (MCE) to support Hong Kong banks' growth and 
profitability in the medium-term, especially for banks with Chinese parents. 
However, MCE concentration, at 29% of banking-system assets in 1H19, makes the 
sector vulnerable to deterioration in these exposures as growth in China slows. 

The Stable Outlook reflects Fitch's expectation that the banks' ratings will 
remain supported by their intrinsic financial credit profiles or parental 
support, despite a more challenging economic landscape. Deterioration in the 
operating environment, should it become a more binding constraint on the banks' 
intrinsic profiles, could exert downward pressure on their Viability Ratings. 
This could come from, among other things, sustained erosion of their funding and 
liquidity positions from significant capital outflows, which will weigh 
negatively on their company profiles or franchises, or more broadly, on the 
operating environment if the outflows are systemic. 

OCBC Wing Hang Bank Limited; Long Term Issuer Default Rating; Affirmed; AA-; 
RO:Sta

; Short Term Issuer Default Rating; Affirmed; F1+

; Local Currency Long Term Issuer Default Rating; Affirmed; AA-; RO:Sta

; Viability Rating; Affirmed; a-

; Support Rating; Affirmed; 1

DBS Bank (Hong Kong) Limited; Long Term Issuer Default Rating; Affirmed; AA-; 
RO:Sta

; Short Term Issuer Default Rating; Affirmed; F1+

; Viability Rating; Affirmed; a-

; Support Rating; Affirmed; 1

Shanghai Commercial Bank Limited; Long Term Issuer Default Rating; Affirmed; A-; 
RO:Sta

; Short Term Issuer Default Rating; Affirmed; F2

; Viability Rating; Affirmed; a-

; Support Rating; Affirmed; 5

; Support Rating Floor; Affirmed; NF

----subordinated; Long Term Rating; Affirmed; BBB+

Dah Sing Bank, Limited; Long Term Issuer Default Rating; Affirmed; BBB+; RO:Sta

; Short Term Issuer Default Rating; Affirmed; F2

; Viability Rating; Affirmed; bbb+

; Support Rating; Affirmed; 5

; Support Rating Floor; Affirmed; NF

----subordinated; Long Term Rating; Affirmed; BBB

Chong Hing Bank Limited; Long Term Issuer Default Rating; Affirmed; BBB; RO:Sta

; Short Term Issuer Default Rating; Affirmed; F2

; Viability Rating; Affirmed; bbb

; Support Rating; Affirmed; 5

; Support Rating Floor; Affirmed; NF

----subordinated; Long Term Rating; Affirmed; BBB-

Key Rating Drivers

IDRS AND VIABILITY RATINGS

WHB

The affirmation of WHB's Long-Term IDR reflects Fitch's view of its 
Singapore-based parent Oversea-Chinese Banking Corporation Limited's (OCBC, 
AA-/Stable/aa-) high ability and propensity to provide extraordinary support to 
WHB if needed. Fitch equalises WHB's Long-Term IDR with that of OCBC due to 
WHB's key and integral role in greater China, one of OCBC's core markets, and 
the high level of management and operational integration. Risk management 
practices under OCBC's risk framework have been largely implemented at WHB and 
at WHB's Macao and China subsidiaries. WHB, including its two subsidiaries, 
accounted for about 8% of OCBC's operating profit in 1H19.

WHB's Viability Rating captures the bank's solid company profile, as its 
franchise benefits - in Fitch's opinion - from cross-selling opportunities and 
referral businesses across OCBC's wider networks in north and south-east Asia. 
WHB's loss-absorption buffer remains adequate in light of the bank's moderate 
risk appetite, with the common equity Tier 1 (CET1) ratio improving to 15.5% in 
1H19, from 14.2% in 2018. WHB's gross loans shrank by 2% during 1H19, following 
higher-than-sector growth of 8% in 2018, as the bank has taken a more cautious 
lending approach, especially in China. Slower deposit growth has also limited 
the bank's loan growth, increasing its loan/deposit ratio to 87% as of June 
2019. WHB's overall asset-quality remains satisfactory, with an impaired loan 
ratio of 0.5% at end-1H19.

DBSHK

The affirmation reflects Fitch's view of the strong ability and propensity of 
the Singapore-based parent DBS Bank Ltd. (DBS, AA-/Stable/aa-) to extend 
extraordinary support to DBSHK, if required. DBSHK's IDRs are equalised with 
those of DBS, as DBSHK plays an integral role in supporting its parent's 
expansion into greater China. Moreover, with Hong Kong being a key 
wealth-management hub in Asia, DBSHK is in a strong position to capture 
incremental flows from the increasingly affluent population in Hong Kong and 
mainland China. This should enhance DBS's wealth-management capability; a key 
strategic focus for the group. DBSHK has consistently been DBS's second-largest 
profit contributor, contributing 16% of group net profit in 1H19, and its assets 
accounted for 14% of group assets. The single management team at DBSHK and DBS's 
Hong Kong branch suggests a high level of integration and strategy within DBS as 
a whole. 

DBSHK's Viability Rating reflects the bank's solid franchise, which benefits 
from parental support and branding. The rating also takes into consideration the 
bank's sound financial profile, with its MCE continuing to trend substantially 
below that of peers. DBSHK's CET1 ratio improved to 16.5% in 1H19, with a Fitch 
Core Capital (FCC) ratio of 17.0% (2H18: 15.5%), supported by steady earnings 
and a stable dividend payout ratio. Fitch believes DBSHK's capitalisation is in 
line with that of similarly rated peers. 

SCB

SCB's IDRs and Viability Rating are supported by its consistently stable 
asset-quality metrics and high capital buffers, despite its limited franchise 
and scale as compared with most local peers. Lending growth was ahead of peers', 
up by around 13% during 1H19, on strong overseas growth in developed markets, 
such as the US and UK, while its FCC ratio was a solid 17%. We expect SCB's 
growth to slow in the near-term given market uncertainties, but for the bank to 
maintain stringent underwriting standards. SCB's asset quality is resilient 
based on its record, with an impaired loan ratio of around 0.6% in 1H19, 
supported by high levels of traditional, collateralised-based lending. SCB's MCE 
was around 29% of assets at end-1H19, similar to the sector average. 

The bank's Viability Rating also captures its stable liquidity profile, with a 
low loan/deposit ratio of 59% and liquidity maintenance ratio of 50% in 1H19, 
better than that of similarly sized Hong Kong peers. We expect SCB's 
profitability to remain steady, supported by its low risk appetite and capital 
buffers.

DSB

DSB's IDRs and Viability Rating reflect its small franchise in Hong Kong, with a 
1% deposit market share, although it has a niche in SME and retail lending. 
These segments may see greater near-term asset quality pressure relative to 
peers, but should be mitigated by DSB's moderate risk appetite. DSB also has a 
presence in China and Macao to complement its cross-border business; these 
markets represented 5% and 11%, respectively, of its total loans at end-1H19. 
DSB kept its impaired loan ratio at 0.6% in 1H19. 

DSB's overall core profitability is similar to that of peers, though it recorded 
an impairment loss from its 15%-owned associate, Bank of Chongqing Co., Ltd., in 
1H19. However, this is excluded from DSB's capital ratios and we expect the bank 
to maintain sound capital buffers, though its capital ratios (1H19: CET1 ratio 
of 13.3%) are lower than those of Hong Kong peers and are a rating weakness for 
the bank. 

CHB

The IDRs and Viability Rating of CHB reflect the bank's small domestic franchise 
but higher risk appetite relative to peers, driven by rapid China-related growth 
stemming from customer referrals from its 75% parent, Yuexiu Group (YXG). YXG is 
wholly owned by the Guangzhou State-owned Assets Supervision and Administration 
Commission. CHB's business also benefits from referrals from its 7% strategic 
state-owned shareholder, Guangzhou Metro Group Co., Ltd. (A+/Stable). These ties 
resulted in CHB's higher MCE and concentration in cross-border lending to the 
Chinese central government (around 43% of total non-bank MCE). 

CHB's MCE has increased significantly in recent years, reaching almost 55% of 
assets in 1H19 (2016: 40%). We believe these loans are mostly concentrated in 
the property, infrastructure and transportation sectors, coinciding with YXG's 
main businesses. CHB's profitability has improved due to the high loan growth in 
the Pearl River Delta region and these loans are high yielding, but excessive 
risk-taking can be credit negative for CHB's Viability Rating. CHB's FCC ratio 
declined to around 14% in 1H19, from 15% in 2018, on continued loan growth. The 
bank issued USD400 million in additional Tier 1 instruments in July 2019, part 
of which was used to offset an earlier redemption of USD300 million. We do not 
expect the bank to maintain its capital levels given its above-peer loan-growth 
aspirations and believe the bank will continue to rely on external funding to 
fund medium-term growth. 

SUPPORT RATINGS AND SUPPORT RATING FLOORS 

The Support Ratings of '1' for WHB and DBSHK reflect their parents' ability and 
propensity to support their subsidiaries. Fitch equalises the IDRs of WHB and 
DBSHK with those of their parents, as we view the Hong Kong subsidiaries as core 
platforms for their parents' greater China expansion strategy. 

The Support Ratings of '5' and Support Rating Floors of 'No Floor' for SCB, DSB 
and CHB reflect our view that senior creditors cannot rely on extraordinary 
support from the government, as Hong Kong implemented a bank resolution 
framework in 2017. We do not consider the integration of SCB and CHB with their 
respective parents as high enough for us to consider institutional support for 
these banks.

SUBORDINATED DEBT (DSB, CHB, SCB)

Fitch rates the legacy subordinated notes of DSB and CHB one notch below their 
respective Viability Ratings, which are the same as their IDRs, to reflect 
below-average recovery prospects, as the notes are subordinated to senior 
unsecured instruments. 

The Basel III-compliant issues with non-viability triggers of DSB, CHB and SCB 
are also rated one notch down from the banks' Viability Ratings due to their 
partial write-down features.

RATING SENSITIVITIES

IDRS AND VIABILITY RATINGS

The banks' Viability Ratings are sensitive to changes in the banks' franchises 
and business models, including changes in their China strategies and risk 
appetites over the composition of China-related activities. The pace of loan 
expansion, without maintaining stringent risk controls, could trigger rating 
downgrades. Their Viability Ratings are also sensitive to our assessment of Hong 
Kong's operating environment, which may be subject to downward pressure if 
prolonged social disruption changes our perception of the business environment, 
or if there are sustained capital outflows from Hong Kong that erode the banks' 
funding and liquidity buffers. 

The IDRs on WHB and DBSHK are also sensitive to changes in Fitch's perception 
around the propensity of institutional support from their respective parents. A 
change in the ratings of their parents would also lead to a change in their 
IDRs.

SUPPORT RATINGS AND SUPPORT RATING FLOORS 

The Support Ratings of WHB and DBSHK could change if Fitch were to conclude that 
there has been a shift in the ability or propensity of their respective parents 
to provide timely support. However, Fitch does not consider this to be likely in 
the medium term.

We do not expect any near-term changes in our sovereign support assessment for 
SCB, DSB or CHB. A reinstatement or upward revision of the Support Rating Floors 
would be contingent on an increase in the Hong Kong government's propensity to 
support its banks. We believe this is not probable due to the implementation of 
the resolution regime in 2017.

SUBORDINATED DEBT (DSB, CHB, SCB)

The ratings on the subordinated debt are sensitive to changes in the banks' 
Viability Ratings and the notching for loss severity, in accordance with Fitch's 
bank-rating criteria. Fitch published a bank rating exposure draft on 15 
November 2019 and is seeking market feedback on proposed changes by the end of 
the year.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit 
relevance is a score of 3 - ESG issues are credit neutral or have only a minimal 
credit impact on the entity, either due to their nature or the way in which they 
are being managed by the entity.

For more information on our ESG Relevance Scores, visit www.fitchratings.com/esg

Contacts: 

Primary Rating Analyst

Savio Fan, 

Associate Director

+852 2263 9955

Fitch (Hong Kong) Limited

19/F Man Yee Building 60-68 Des Voeux Road Central

Hong Kong

Primary Rating Analyst

Franco Lam, 

Director

+852 2263 9969

Fitch (Hong Kong) Limited

19/F Man Yee Building 60-68 Des Voeux Road Central

Hong Kong

Secondary Rating Analyst

Franco Lam, 

Director

+852 2263 9969

Secondary Rating Analyst

Savio Fan, 

Associate Director

+852 2263 9955

Committee Chairperson

Heakyu Chang, 

Senior Director

+822 3278 8363

 

Media Relations: Wai Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: 
wailun.wan@thefitchgroup.com; Alanis Ko, Hong Kong, Tel: +852 2263 9953, Email: 
alanis.ko@thefitchgroup.com.

Additional information is available on www.fitchratings.com

Applicable Criteria 

Bank Rating Criteria (pub. 12 Oct 2018)

https://www.fitchratings.com/site/re/10044408

Exposure Draft: Bank Rating Criteria (pub. 15 Nov 2019)

https://www.fitchratings.com/site/re/10101980

Short-Term Ratings Criteria (pub. 02 May 2019)

https://www.fitchratings.com/site/re/10073011

Additional Disclosures 

Dodd-Frank Rating Information Disclosure Form 

https://www.fitchratings.com/site/dodd-frank-disclosure/10102046

Solicitation Status 

https://www.fitchratings.com/site/pr/10102046#solicitation

Endorsement Policy 

https://www.fitchratings.com/regulatory

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