Fitch Upgrades Wing Hang Bank to 'AA-', Affirms Hong Kong Banks

Dah Sing Banking

08/05/2018 09:50

(The following statement was released by the rating agency)


Fitch Ratings-Hong Kong-May 08: Fitch Ratings has today upgraded the Long-Term 
Issuer Default Ratings (IDR) of OCBC Wing Hang Bank Limited (WHB) to 'AA-' from 
'A+'. Fitch has also affirmed the Long-Term IDRs of seven Hong Kong banks as 
follows:

- Hang Seng Bank Limited (HSB) at 'A+',

- Bank of China (Hong Kong) Limited (BOCHK) at 'A',

- China Construction Bank (Asia) Corporation Limited (CCB Asia) at 'A',

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

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

- China CITIC Bank International Limited (CNCBI) at 'BBB', and 

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

Fitch has also revised the Rating Outlook for CNCBI to Positive from Stable due 
to the bank's stronger capital position. The rating may be upgraded if the bank 
is able to maintain its capital position over the next 12-18 months.

The Outlooks for the other banks are Stable. 

At the same time, Fitch has, for the first time, assigned a Viability Rating 
(VR) of 'bbb' to CCB Asia as its standalone franchise has grown to a meaningful 
scale, and has upgraded the Short-Term IDRs for CNCBI and CHB as their liquidity 
and funding are rating strengths.

The rating actions stem from Fitch's periodic peer review of the Hong Kong 
banks. A full list of rating actions is at the end of this rating action 
commentary.

KEY RATING DRIVERS 

IDRS, VIABILITY RATINGS AND SENIOR DEBT

The banks' ratings are driven by each lender's intrinsic strength, with the 
exceptions of WHB's and CCB Asia's, which are driven by our view of an extremely 
high probability of timely parental support.

The rating affirmations reflect Fitch's view that the banks will maintain 
sufficient financial flexibility as they continue to grow quickly (2017 system 
loan growth: 16%) in a benign, yet challenging, operating environment. The 
ratings primarily capture the banks' different franchises and risk appetites, 
which ultimately determine their asset quality and broader financial profiles. 
We expect the banks' exposures to the buoyant local property market and mainland 
China to expand, though the nature and extent will depend on each bank's 
appetite for risk and franchise, including any linkages to mainland parents. We 
expect impaired loan ratios and credit costs to rise only gradually over the 
next 12-18 months given the stable growth outlooks for Hong Kong and mainland 
China. Active supervision by the Hong Kong Monetary Authority (HKMA) supports 
the banks' solid liquidity positions and sound loss-absorption buffers. 

The affirmations are in spite of Fitch's downward adjustment of its assessment 
of the operating environment for Hong Kong banks to a mid-point of 'a' with 
stable trend from 'a+/negative'. The revision primarily captures the growing 
connectivity between the economies and financial systems of Hong Kong and China. 
Our assessment takes into account Hong Kong's high macro-prudential risk due to 
above-trend credit growth and significant spill-over risks from high property 
price inflation and rising household debt, notwithstanding Hong Kong banks' 
relatively small direct exposure. 

Hong Kong's small, flexible and open economy with unparalleled access to China 
provides its banks growth opportunities that are rare in mature markets. Inflow 
of assets from China and the creation of wealth from high property prices have 
led to deposit growth and stimulated lending operations. We expect banks' 
mainland China exposure (MCE), which reached 30% of assets at end-2017, to 
increase as the majority of Hong Kong's future economic activity will be 
directly or indirectly related to China. We expect Hong Kong banks to 
increasingly finance Chinese customers' activities on the mainland, particularly 
those in neighbouring Guangdong province and major cities. In turn, Chinese 
banks are likely to leverage their considerable resources and customer bases to 
pursue market share growth in the territory.

Fitch sees the HKMA as a strict regulator with a strong track record of 
curtailing banks' delinquencies when house prices drop, creating capital buffers 
and prompt implementation of international standards. Maintaining independent 
and prudent oversight of banks' China expansion is more challenging for the 
HKMA, which relies on coordination with mainland authorities to ensure banks' 
mainland activities are well-managed and remain well-capitalised. HKMA has thus 
far refrained from setting China-related risk limits or additional buffers and 
we would not expect them to change that stance in the near term.

OCBC Wing Hang Bank Limited

The upgrade of WHB's Long-Term IDR reflects Fitch's view of its parent 
Oversea-Chinese Banking Corporation Limited's (AA-/Stable/aa-) high ability and 
propensity to support the bank. Fitch has equalised the Long-Term IDRs of WHB 
and OCBC due to WHB's important role in OCBC's strategy for Greater China, one 
of the parent's core markets. The operational integration in systems and policy 
frameworks has progressed since 2014 and is now quite high. Risk-management 
practices under OCBC's risk framework have been implemented in WHB with the aid 
of representatives and staff seconded from OCBC. 

WHB's VR of 'a-' captures the bank's established franchise, stable business 
model and moderate risk appetite. Fitch expects the bank's loss-absorption 
buffers to remain adequate and asset quality satisfactory. The asset quality of 
loans in mainland China improved with the impaired-loan ratio down to 1% at 
end-2017 (end-2016: 3.1%). The improvement was partly due to the sale of problem 
loans that were originally granted by OCBC Bank (China) Limited to OCBC under an 
agreement signed at the time it was merged with Wing Hang Bank (China) Limited.

WHB's gross loan growth of 12% is close to that of the sector despite a 3% drop 
in mainland China loans. However, its MCE increased by 58.5% in 2017, driven by 
the bank's investment in fixed-income securities issued by some Chinese banks. 
We expect WHB's loan growth in mainland China to resume in 2018 under OCBC's aim 
to support customer activities within China's Greater Bay Area.

Hang Seng Bank Limited

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 The Hongkong and Shanghai Banking Corporation Limited (HKSB, 
AA-/Stable/aa-). HSB is more exposed to the property market than its peers, with 
its domestic property-related lending accounting for half of its loans and a 
quarter of its assets at end-2017. However, loan-to-value ratios on these 
exposures are generally very low.

We expect China to remain a key source of growth. The bank's gross MCE increased 
to 20% of assets at end-2017 from 19% a year earlier, driven by a 8% rise in 
non-bank MCE (2016: a 9% reduction) and a 36% increase in claims on Chinese 
banks (2016: a 24% reduction). Asset quality remains sound, with impaired loan 
ratio improving to 0.2% at end-2017 from 0.5% at end-2016. The bank's loan 
quality benefited from its large exposures to low-risk residential mortgages, 
which accounted for 24.3% of total loans at end-2017. The impaired loan ratio 
for loans residing in China improved to 0.2% at end-2017 from 1.2% at end-2016.

HSB's capitalisation remains solid. Its Fitch Core Capital (FCC) 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 18%, excluding property revaluation 
reserves. Its funding and liquidity profile benefits from its strong retail 
deposit franchise and from being associated with HKSB.

Bank of China (Hong Kong) Limited

BOCHK's IDRs and VR align with our upgraded assessment of the bank's risk 
appetite, which is of high importance to the VR. The ratings also reflect the 
bank's strong market position in Hong Kong and its strong capitalisation, which 
provided it with flexibility to acquire Bank of China Limited's (BOC; 
A/Stable/bb) south-east Asian operations. Its FCC ratio stood at 22.3% at 
end-2017 (or 18.7% without property revaluation reserves), one of the highest in 
the peer group. We also capture operational and strategic linkages to its parent 
and its above-peer concentration in China exposures (2017: 39% of assets) in our 
ratings. 

We expect the bank to maintain a sound financial profile. Its impaired loan 
ratio is low at 0.2%, whereas its provision coverage ratio was above peers'. 
Operating profitability is robust at 3.3% 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.

BOCHK's IDRs are driven by its VR, but, in our view, the bank benefits from an 
extremely high probability of support from its parent BOC, and ultimately, 
support from the Chinese sovereign (A+/Stable), if needed.

China Construction Bank (Asia) Corporation Limited

Fitch's ratings on CCB Asia reflect our view of an extremely high probability 
that its parent, China Construction Bank Corporation (CCB, A/Stable/bb), will 
extend the subsidiary timely support, if required. CCB Asia is CCB's largest 
overseas subsidiary, and it facilitates CCB's offshore yuan business and 
manages, together with CCB's Hong Kong Branch, around 40% of CCB's overseas 
assets. CCB Asia's business strategy, client coverage, management and risk 
appetite are strongly tied with that of CCB. The subsidiary's systems for 
corporate business have been integrated with those of CCB and integration of 
their retail business systems is expected to be completed in 2018. 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 and in line with Fitch's 
criteria. 

Fitch has assigned CCB Asia a VR of 'bbb', which reflects Fitch's view that the 
bank now has a meaningful standalone franchise with a deposit market share of 
close to 3%. As is the case for most of the banks in this review, the main 
rating drivers are risk appetite and franchise. This is because we believe that 
those will primarily determine the bank's asset quality as it continues to 
facilitate CCB's international expansion. Its financial profile is satisfactory 
with adequate liquidity and capitalisation, notwithstanding its 
weaker-than-peers profitability due to its higher funding costs given the ratio 
of low-cost current and savings accounts to total deposits was lower than that 
of peers at 23% at end-2017.

Shanghai Commercial Bank Limited

SCB's IDRs and VR reflect the bank's niche franchise and benign loan quality, 
which is supported by high reliance on traditional collateral-based lending (82% 
of loans), lower-than-peers' portion of China-related lending, and high 
interbank assets and securities investment portfolio (50% of assets). SCB's loan 
growth of 21% in 2017 was faster than that of peers, driven by a 56.9% increase 
in loans in mainland China, 17.2% rise in loans in the US, and 18.6% increase in 
Hong Kong. The strong growth put pressure on SCB's FCC ratio, which dropped to 
17.6% at end-2017 (2016: 18.8%), although it remains above the peer average 
(16.9%). 

We have a negative outlook on SCB's risk appetite as it runs the risk of its 
capital position not keeping up with its growth, though we believe 
capitalisation remains a rating strength.

We expect the bank's profitability to remain steady, supported by its lower cost 
base and improved margin due to the gradually rising interest rates. SCB 
maintained a low loan-to-deposit ratio of 53.5% at end-2017. We expect both 
profitability and liquidity to be stable in the near term.

Dah Sing Bank, Limited

DSB's IDRs and VR reflect the bank's local franchise and moderately high risk 
appetite, which is offset by adequate loss-absorption buffers. Its impaired loan 
ratio decreased to 0.6% in 2017 from 1.1% in 2016, mostly due to recoveries and 
charge-offs of non-performing loans, while its loan growth remains moderate 
(2017: 4.6%). We expect DSB to maintain its steady growth strategy, with higher 
focus on personal lending and SMEs.

The profitability of DSB remained stable despite net fee and commission income 
rising 25.9% and net interest income increasing 7%. DSB's impairment loss on its 
investment in Bank of Chongqing, whose estimated recoverable amount fell below 
the carrying amount of the investment, weighed on operating profit. However, 
DSB's FCC ratio increased to 15.2% at end-2017 (end-2016: 14.4%) due to its 
stable profitability

China CITIC Bank International Limited

CNCBI's IDRs and VR reflect its above-peer average growth and higher 
concentration risk in China. This is mitigated by stronger capitalisation and 
good liquidity profile, which contributed to the upgrade of the Short-Term IDR. 
Its close ties and connectivity with its 75% parent China CITIC Bank Corporation 
Limited (CNCB; BBB/Stable/b+) enables it to generate cross-border business from 
its parent's clients. 

Wholesale and cross-border loans accounted for 76% of total loans in 2017, with 
individual and business banking loans making up another 23%. The bank also has a 
high concentration in property-related lending. Its impaired loan ratio 
increased to 1.3% at end-2017 (2016: 1%).

The improvement in CNCBI's capitalisation and leverage reflects the significant 
strengthening in the bank's capitalisation after five financial investors 
injected capital of HKD9 billion in December 2017. Its FCC and CET1 ratios 
increased to 15.8% and 14.5%, respectively (2016: 12.2% and 10.8%, respectively) 
following the capital injection. Fitch may consider upgrading the bank's ratings 
if it can sustain the current strong capital position over the next 12-18 
months. CNCBI's liquidity position also remains a rating strength.

CNCBI's senior unsecured MTN programme is rated in line with its IDRs and in 
line with Fitch's criteria.

Chong Hing Bank Limited

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, Yuexiu 
Group, which is wholly owned by the Guangzhou State-owned Assets Supervision and 
Administration Commission. The bank maintains a good liquidity profile, which 
contributed to the upgrade of the Short-Term IDR. 

As a result of being the financial arm of a mainland-based conglomerate, CHB has 
a high concentration in cross-border lending to the central government (38% of 
total non-bank MCE) and Chinese state-owned enterprises' offshore subsidiaries 
that are mainly based in Hong Kong (17% of total non-bank MCE). The bank's MCE 
increased significantly to almost 50% of assets at end-2017 (2016: 40%). We 
believe that these loans are fairly concentrated in the property, infrastructure 
and transportation sectors where Yuexiu Group has its main businesses. 

CHB's profitability will continue to remain lower than that of peers, given the 
bank's small franchise and thus low pricing power; lower cost efficiency amid 
ongoing expansion in the Pearl River Delta region; and low contribution from 
non-loan businesses. Capitalisation is constrained by weaker internal capital 
generation, but remains satisfactory at the rating level with an FCC ratio of 
12.7% at end-2017 (2016: 13.6%), which is lowest of the peer group.

SUPPORT RATING AND SUPPORT RATING FLOOR (SRFS) 

The Support Ratings of '1' for WHB, HSB, BOCHK and CCB Asia, and '2' for CNCBI 
reflect their parents' respective ability and propensity to support their 
subsidiaries.

Fitch equalises the IDRs of WHB and CCB Asia with those of their parents. For 
BOCHK and CNCBI, Fitch would also equalise their IDRs with their parents' IDRs, 
and the institutional support currently underpins their VR-driven ratings. We 
view them as important platforms for their parents' overseas expansion strategy 
and their default would have large impact on the parents' reputations. HSB's IDR 
is one notch below HKSB's rating due to its different branding and its 38% 
public ownership, which reflects a certain degree of autonomy.

The Support Rating 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 from the government as Hong Kong implemented a bank resolution framework 
in 2017.

SUBORDINATED DEBT (BOCHK, CCB Asia, DSB, CNCBI, CHB, SCB)

Fitch rates the legacy subordinated notes of BOCHK, DSB, CNCBI and CHB one notch 
below their respective IDRs to reflect their below-average recovery prospects 
because they are subordinated to senior unsecured instruments. 

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

RATING SENSITIVITIES

IDRS, VIABILITY RATINGS AND SENIOR DEBT

The VRs of all banks in this peer group are sensitive to changes in banks' risk 
appetites and the pace of expansion in the absence of mitigating measures. 
Changes in the banks' franchises and business models, the composition of 
China-related activities without maintaining stringent risk controls, stable 
funding and adequate capitalisation could also trigger downgrades in the banks' 
ratings. 

Maintenance of stable asset quality, sufficient capitalisation and healthy 
liquidity are the key variables that support the ratings at the current levels.

CNCBI's IDR and VR could be upgraded if the bank maintains its stronger 
capitalisation without compromising its risk appetite. A sudden change of the 
bank's risk appetite or unforeseen weaknesses on its financial profile could 
lead to negative action on the bank's ratings, although it is not likely in the 
near term. 

SCB's IDR and VR could be downgraded if it continues to expand rapidly without 
strengthening its capitalisation.

A downgrade in the VRs of CNCBI, BOCHK and HSB would only trigger a downgrade of 
their IDRs if their parents' IDRs or their propensity to support their 
subsidiaries were also to weaken. HSB's Short-Term IDR could be downgraded if 
Fitch was to view liquidity support from HKSB as less likely.

The IDRs on WHB and CCB Asia are sensitive to a change 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 (SRFS)

The Support Ratings of WHB, HSB, BOCHK, CCB Asia and CNCBI could change if Fitch 
were to conclude that there has been a change the ability and propensity of 
their respective parents - and in the cases of BOCHK, CCB Asia and CNCBI, 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 an increase 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 Limited

Long-Term Foreign-Currency IDR upgraded to 'AA-' from 'A+'; Outlook Stable

Long-Term Local-Currency IDR upgraded to 'AA-' from 'A+'; Outlook Stable

Short-Term IDR affirmed at 'F1+'

Viability Rating affirmed at 'a-'

Support Rating affirmed at '1'

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'

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 notes without non-viability clauses affirmed at 'A-'

China Construction Bank (Asia) Corporation Limited

Long-Term IDR affirmed at 'A'; Outlook Stable

Short-Term IDR affirmed at 'F1'

Viability Rating assigned at 'bbb'

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-'

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'

Basel III-compliant subordinated notes affirmed at 'BBB+'

Dah Sing Bank, Limited

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 without non-viability clauses affirmed at 'BBB'

Basel III-compliant subordinated notes affirmed at 'BBB'

China CITIC Bank International Limited

Long-Term IDR affirmed at 'BBB'; Outlook revised to Positive from Stable

Short-Term IDR upgraded to 'F2' from 'F3'

Viability Rating affirmed at 'bbb'

Support Rating affirmed at '2'

MTN Programme affirmed at 'BBB'

Subordinated notes without non-viability clauses affirmed at 'BBB-'

Basel III-compliant subordinated notes affirmed at 'BBB-'

Chong Hing Bank Limited

Long-Term IDR affirmed at 'BBB'; Outlook Stable

Short-Term IDR upgraded to 'F2' from 'F3'

Viability Rating affirmed at 'bbb'

Support Rating affirmed at '5'

Support Rating Floor affirmed at 'No Floor'

Subordinated notes without non-viability clauses affirmed at 'BBB-'

Basel III-compliant subordinated notes affirmed at 'BBB-'

Contact: 

Primary Analyst

Savio Fan

Associate Director

+852 2263 9955

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: 
wailun.wan@fitchratings.com.

Additional information is available on www.fitchratings.com

Applicable Criteria 

Bank Rating Criteria (pub. 23 Mar 2018)

https://www.fitchratings.com/site/re/10023430

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Dodd-Frank Rating Information Disclosure Form 

https://www.fitchratings.com/site/dodd-frank-disclosure/10029582

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https://www.fitchratings.com/site/pr/10029582#solicitation

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