Fitch Affirms 9 Hong Kong Banks; Outlook Stable

Dah Sing Financial Holdings

13/05/2016 11:25

(The following statement was released by the rating agency)

HONG KONG, May 13 (Fitch) Fitch Ratings has today affirmed the Long-Term Issuer 
Default Ratings (IDR) of nine Hong Kong banks: 

- Hang Seng Bank Limited (HSB) and OCBC Wing Hang Bank Ltd (WHB) at 'A+' 

- Bank of China (Hong Kong) Ltd (BOCHK), Industrial and Commercial Bank of China 
(Asia) Ltd (ICBC Asia) and China Construction Bank (Asia) Corporation Limited 
(CCB Asia) at 'A'

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

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

- China CITIC Bank International Limited (CNCBI) and Chong Hing Bank Limited 
(CHB) at 'BBB'

The Outlooks for the ratings are Stable. A full list of rating actions is at the 
end of this rating action commentary.

The affirmations and Stable Outlooks reflect Fitch's view that these banks will 
maintain sufficient financial flexibility relative to their current ratings to 
navigate the more difficult conditions and mitigate high concentration in the 
domestic property market and mainland China amid an increasingly challenging 
macroeconomic environment. 

The IDRs on WHB, ICBC Asia and CCB Asia continue to reflect our view of an 
extremely high probability that they would receive timely parental support, if 
required. Their Stable Outlooks mirror that of their parents.

The ratings actions follow a periodic review of the Hong Kong banks (see Hong Kong Banks 
2015 Report Card /a  which is also released today). Ratings remain supported by 
low credit costs, small impaired loan ratios, moderating loans growth, 
satisfactory profitability and adequate capitalisation at end-2015 while banks 
remain subject to tight supervision by the Hong Kong Monetary Authority (HKMA), 
in particular on domestic mortgages. Mainland China exposures (MCE), amounting 
to USD759bn or 27.3% of system-assets at end-2015 (2014: USD890bn, 32.8%), have 
held up well and their rapid rise until 2014 is a reminder of Hong Kong banks' 
upside growth potential given their proximity to the Mainland. 

Fitch has changed the Sector Outlook to Negative. This reflects cyclical 
headwinds for Hong Kong's small, open economy given the increasing integration 
of Hong Kong's and China's economies and their banking systems, as well as the 
banks' material direct and indirect exposure to China. The banking sector's 
profitability has weakened and we expect further challenges due to significantly 
weaker forecasts for GDP growth, sluggish loans growth and lower return 
expectations on deploying excess liquidity. We expect credit costs to continue 
to rise and maintain our forecast of a 1% NPL ratio for the total book, 
including mortgages, and the NPL ratio of 1.5%-2% for the China-related business 
in 2016 (2015: 0.70% and 0.78%, respectively). 

We also have assigned a negative trend on our 'a+' operating environment 
assessment for Hong Kong banks because the economic environment may be worse 
than expected due to greater cyclical volatility.

The Hong Kong banks' risk profiles have evolved, with their exposure to China 
much larger than in the last downturn. Fitch expects this trend to continue over 
the long term. The agency views these exposures as higher risk compared with 
Hong Kong-based exposures, which require banks to maintain greater absorption 
buffers, in our view. This and the challenges to the regulatory oversight of the 
system put downward pressure on the operating environment assessment for Hong 
Kong-based banks. However, the banks' rating Outlooks remain stable as they 
maintain financial profiles in line with their ratings. 

The banks' customer niches and strategies of their parents can drive significant 
differences in the composition and pace of growth of their China portfolios, and 
the extent of shifts from shorter-term bank placements and trade-related lending 
to longer-term onshore activities targeting mainland commercial and individual 
borrowers. We expect banks to focus less on market share gains and more on 
risk-adjusted profitability. Subsidiaries of Chinese banks will continue to 
expand strongly due to customer referrals from parents. This could entail 
greater risk even though the subsidiaries are required to perform their own due 
diligence. HKMA undertakes regular onsite examinations of the banks' 
China-related activities, but we believe that oversight may be more challenging 
than for domestic exposures, especially mortgages.

Hong Kong and China have Fitch Macro-Prudential Risk Indicator scores of 3, 
which signal potential for buildup of a relatively high degree of systemic risk 
(see Macro-Prudential Risk 
Monitor - May 2016 /a ). These risks could materialise as Hong Kong's exports 
and imports are contracting at their sharpest rate since 2009, while visitor 
arrivals have plummeted led by a 17.2% drop in arrivals from China. Hong Kong 
banks' Mainland China-related lending to non-bank borrowers rose just 3.2% in 
2015 (2014: 23.1%) because of a sharp decline in trade-related lending (-22.4%). 
Fitch forecasts Hong Kong's real GDP growth to decelerate to 1.6% this year 
(2017 forecast: 1.7%, 2015: 2.6%). Market and liquidity risk is elevated with 
banks being exposed to volatility in the Chinese yuan and related interest rates 
as well as potential changes in Chinese regulations. 

KEY RATING DRIVERS 

IDRS, VIABILITY RATINGS (VRS) AND SENIOR DEBT

Hang Seng Bank

HSB's ratings capture its strong and balanced intrinsic profile. We upgraded our 
management and strategy assessment based on HSB's thoughtful strategic 
positioning, maintenance of its vigilant financial profile and operational 
support from being part of HSBC Holdings plc (AA-/Stable), which is evident from 
the aligned risk procedures and secondment of management. 

HSB has lowered its growth goals in response to the economic slowdown. In 2015, 
the bank's loan book grew by only 5%, which was in line with the banking 
system's growth but was below the double-digit rates in past years. The bank's 
corporate MCE remains largely unchanged from year ago.  

 

HSB remains the most exposed to the domestic property market among peers as 
property loans, including residential mortgage and commercial loans, account for 
about a quarter of the bank's assets. Loan quality remains solid with an overall 
NPL ratio of 0.4% at end-2015. HSB's Fitch Core Capital (FCC) ratio adjusted for 
HKD16.8bn of property revaluation reserves was solid at 15.1% at end-2015. Fitch 
expects this to remain a rating strength in the near to medium term as 
management has opted to maintain the strong capital ratio to retain flexibility 
amid the regulatory and economic uncertainties. 

The agency has also affirmed HSB's Short-Term IDR at 'F1+' to reflect the 
strength of its liquidity and funding profile, which are underpinned by the 
bank's stable retail deposit base and potential funding support from its parent. 
Its reported loan-to-deposit ratio of 70% and liquidity coverage ratio of 195% 
at end-2015 are solid compared with peers'. The bank maintains a sizable 
security portfolio, which buffers it against potential refinancing risk. 

OCBC Wing Hang Bank 

The affirmation of WHB's ratings reflect Fitch's view that the ability and 
propensity of its parent Oversea Chinese Banking Corp (OCBC; AA-/Stable) to 
support the bank remain unchanged. 

WHB's VR of 'a-' captures the bank's solid loss absorption buffers, stable asset 
quality and good intrinsic strength. We expect the bank to continue to maintain 
tight underwriting standards and risk controls to mitigate concentration risks 
from higher property and China exposures, given its aim to accelerate 
China-related growth after OCBC acquired WHB in 2014.

 

Operational support from OCBC will steadily increase, in our view. However, it 
may take longer for WHB to realise tangible benefits to its company profile and 
financial strength than what we initially expected. Such benefits include the 
ability to tap the cross-border trade flows of larger corporates by leveraging 
OCBC's larger franchise, benefits of diversification and economies of scale, and 
increased cross-selling opportunities in non-loan businesses.

Bank of China (Hong Kong)

The affirmation of BOCHK's IDRs and VR reflects the bank's strong market 
position in Hong Kong and solid capitalisation. Its concentration in China 
(2015: 41% of assets) and integration with the parent in terms of management and 
strategy are higher than the sector average, which counterbalance what Fitch 
views as a solid financial profile. Our assessment of BOCHK's risk appetite 
remains in line with the bank's intrinsic profile and is of high importance to 
the VR.

Its financial indicators remain sound. The impaired loan ratio is stable and low 
at 0.23%, operating profitability is steady at 2.96% of risk-weighted assets 
(RWA), FCC ratio is high at 19.6% and structural liquidity is strong, as 
indicated by a loan-to-deposit ratio of 65.4%. 

The planned acquisition of its parent Bank of China's (BOC; A/Stable) south-east 
Asia operations could support BOCHK's businesses and geographical 
diversification. However, there are not enough details yet for us to assess the 
impact.

BOCHK's senior unsecured securities are rated in line with its IDRs as they 
represent direct, unconditional, unsubordinated and unsecured obligations of the 
bank.

Shanghai Commercial Bank

Fitch has affirmed SCB's IDRs and VR to reflect the bank's good intrinsic 
profile, conservative risk appetite and sound capitalisation. The bank continues 
to maintain prudent underwriting standard with high collateral coverage ratio of 
87% at end-2015 and relatively low appetite for China-related lending. Its FCC 
ratio compared well with that of peers at 15.1%. High reliance on 
collateral-based lending and a fall in market rates have impacted the bank's 
profitability, due to its large interbank assets and securities investment 
portfolio (47% of assets). However, the bank's profitability still appears solid 
given its conservative risk profile compared to peers.

Dah Sing Bank

The affirmation of DSB's IDRs and VR reflects the bank's adequate intrinsic 
strength, measured risk appetite and adequate loss absorption buffers. The 
bank's risk appetite has remained low amid the pressure on its loan quality and 
slowing operating environment, which we expect to continue to translate into a 
higher impaired loan ratio (2015: 0.7%; 2014: 0.3%). 

The bank's FCC ratio increased to 16.5% at end-2015 (2014: 13.8%) due to steady 
internal capital generation. However, DSB's minority stake in Bank of Chongqing 
continues to weigh on our capital assessment.

China CITIC Bank International 

CNCBI's IDRs and VR reflect its adequate financial strength, although it has 
rising concentration in China, which continues to render the bank's asset 
quality more vulnerable compared with peers'. The related risks are balanced by 
improving loss-absorption buffers, in particular capitalisation, with the FCC 
ratio rising to 12.8% following a HKD1.8bn injection by its parent in 1Q16. We 
expect it to increase by another 50bp following the sale of its China 
subsidiary, which should be completed in 2H16. Liquidity remains healthy. 

CNCBI maintains autonomy in its risk management and day-to-day operations. 
Impairment charges relating to unexpected loan deterioration of some borrowers 
and non-loan businesses underscore the bank's vulnerability towards the 
weakening operating environment.

Our assessment of the bank's company profile and what we view as a potentially 
increasing risk appetite, remain of high importance to the ratings. 

CNCBI's senior unsecured securities are rated in line with its IDRs as they 
represent direct, unconditional, unsubordinated and unsecured obligations of the 
bank.

Chong Hing Bank 

Fitch has affirmed CHB's IDRs and VR to reflect the bank's adequate financial 
strength. The rating captures what Fitch views as an increased risk appetite 
expressed through above-sector growth. Referrals from its 75% parent Yue Xiu 
Group have widened the counterparty scope, increased concentration risk and 
lifted the bank's mainland China exposure to 40.5% of assets at end-2015 (2014: 
44.3%, 2013: 31.7%). We lowered our company profile and asset quality 
assessments accordingly. 

Low cost efficiency and below-peers' contribution from the non-loan business 
will continue to weigh on overall profitability, even though its growing 
China-related lending has increased profit. Funding and liquidity remain a 
ratings strength and capitalisation is satisfactory relative to assumed risks 
with a FCC ratio of 14.4% at end-2015 (2014: 11.2%). 

Industrial and Commercial Bank of China (Asia) 

ICBC Asia's IDRs are institutional-support driven given the bank's key role in 
parent Industrial and Commercial Bank of China's (ICBC; A/Stable) aspiration to 
provide cross-border financial services to Chinese state-owned enterprises going 
global. The bank set up a new Asia-Pacific business development department in 
January 2016 to capture business opportunities in Asia, underscoring its growing 
importance in coordinating management among ICBC's overseas operations. ICBC 
Asia and ICBC have jointly set up an integrated system to provide financial 
services to meet customers' cross-border financing needs, in particular 
yuan-related products, to take advantage of ICBC's global reach. The support is 
also manifested in ICBC's injection of USD1.65bn in common equity into ICBC Asia 
in 2015.

ICBC Asia's commercial paper programme is rated in line with its Short-Term IDR 
as the notes represent direct, unconditional, unsubordinated and unsecured 
obligations of the bank.

China Construction Bank (Asia)

CCB Asia's IDRs reflect the bank's important role in facilitating China 
Construction Bank Corporation's (CCB; A/Stable) overseas expansion, centralising 
CCB's overseas operations and funding management and the approval processes in 
Asia-Pacific region. CCB Asia cooperates strongly with CCB's overseas investment 
banking arm to underwrite Chinese state-owned entereprises' bond issuances. 
Meanwhile, CCB Asia will integrate with CCB's core banking system in 2H16, which 
will facilitate customer due diligence, product cross-selling and credit 
approval process. 

CCB Asia's senior unsecured securities are rated in line with its IDRs as they 
represent direct, unconditional, unsubordinated and unsecured obligations of the 
bank.

We do not assign VRs to ICBC Asia and CCB Asia given their strong integration 
with their parents. 

SUPPORT RATINGS (SRS) and SUPPORT RATING FLOORS (SRFS) 

HSB's '1' SR 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. Classifying HSB as 
strategically important to HKSB 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. 

Fitch classifies WHB as a strategically important subsidiary of OCBC. The SR of 
'1' reflects its contribution to the parent's Greater China strategy. Fitch 
maintains a one-notch difference in the 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 likely only evolve over the longer term. 

BOCHK's SR of '1' reflects our opinion that BOCHK is a core subsidiary to BOC. 
It has a very strong propensity to support BOCHK and would be able to do so, as 
indicated by its rating and the relative sizes of the two entities. Our view 
that the parent's propensity to support is very strong is based on the integral 
role that BOCHK plays in BOC, which is evident from the shared brand identity, 
strategic importance of the subsidiary, strong profit contribution by BOCHK and 
complementary international operations. 

Fitch classifies CNCBI as a core subsidiary of China CITIC Bank (CNCB; 
BBB/Stable) as CNCBI serves as an important platform for CNCB's overseas 
expansion strategy. CNCB increased its stake in CNCBI to 100% in August 2015 
from 70.3%. Its SR of '2' also captures CNCB's ability to support CNCBI.

The '1' SRs of ICBC Asia and CCB Asia reflect Fitch's expectation that support 
from the Chinese sovereign (A+/Stable) would be passed to the banks through 
their respective parents, given their core importance to their parents, if 
needed.

The SR of '5' and SRF of 'No Floor' for SCB, DSB and CHB reflect our view that 
senior creditors cannot rely on extraordinary sovereign support as Hong Kong 
will ratify and implement its bank resolution framework in 2016.  

SUBORDINATED DEBT (WHB, BOCHK, ICBC Asia, CCB Asia, DSB, CNCBI, CHB)

Fitch uses the support-driven IDRs as the anchor ratings for the subordinated 
debts issued by WHB, ICBC Asia, BOCHK, CCB Asia and CNCBI, reflecting Fitch's 
expectation that in the absence of their own financial strength, institutional 
support from their respective parents would flow through to the subordinated 
debt. DSB's and CHB's subordinated debt is notched from their VRs. 

ICBC Asia's subordinated debt with non-viability clauses are rated two notches 
below the IDRs as the instruments will be written-down in full at the point of 
non-viability and the amount (once written-off) will not be restored.

CCB Asia, DSB and CNCBI's subordinated notes with non-viability clauses are 
rated one notch below their respective IDRs to reflect their below-average 
recovery prospects because they are subordinated to senior unsecured 
instruments, and to take into account their partial write-down features.

The subordinated debt of BOCHK, ICBC Asia, DSB, CNCBI and CHB, all without 
non-viability clauses, are rated one notch below their respective IDRs, to 
reflect the notes' higher loss severity and below-average recovery prospects 
given their subordination to senior unsecured instruments. 

Fitch rates WHB's perpetual junior subordinated debt without non-viability 
clauses three notches from its IDRs - two notches for higher non-performance 
risk given its interest deferral features and one notch for below-average loss 
severity. 

The ratings of DSB's perpetual junior subordinated debt are notched three levels 
from the IDR - two notches for greater non-performance risk given its interest 
deferral features and one notch for below-average loss severity.

RATING SENSITIVITIES

IDRS, VIABILITY RATINGS (VRS) AND SENIOR DEBT

The VRs of all banks in this peer group are sensitive to changes in banks' risk 
appetites, especially for their China exposures in the absence of mitigating 
measures. A change in the composition of China-related activities without 
stringent risk controls, stable funding and adequate capitalisation could 
trigger downgrades in those banks' ratings. VRs for banks with below-peer 
profitability over a sustained period of time could come under pressure.

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

The negative trend on our operating environment assessment, currently at 'a+', 
limits the upgrade potential for banks in this peer group, in particular for 
HSB's given its high VR. 

HSB's Short-Term IDR could be downgraded if Fitch was to view liquidity support 
from HKSB as less likely.

A downgrade in WHB's and BOCHK's VRs would only trigger a downgrade of their 
IDRs if their parent's IDRs or their propensity to support their subsidiaries 
were also to weaken. 

The ratings on the senior debt of BOCHK, ICBC Asia, CCB Asia and WHB are 
sensitive to the same considerations as they are aligned with the IDR.

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 could consider equalising WHB's with OCBC's IDR upon 
stronger integration.

The IDRs on ICBC Asia and CCB Asia are sensitive to changes to their respective 
parents' propensity and ability to provide support, which ultimately ties back 
to the Chinese sovereign. 

SUPPORT RATINGS (SRS) and SUPPORT RATING FLOORS (SRFS) 

The SRs of ICBC Asia, CCB Asia, BOCHK and CNCBI could change if Fitch were to 
reassess the ability and propensity of their respective parents - and in turn 
the Chinese sovereign - to provide support. 

WHB's and HSB's SRs could change if Fitch were to reassess the ability and 
propensity of OCBC and HKSB, respectively, to support their subsidiaries.

We do not expect a change to our sovereign support assessment for SCB, DSB and 
CHB. A reinstatement and an upward revision of the SRFs would be contingent on a 
positive change in the sovereign's propensity to support its banks. While not 
impossible, this is highly unlikely in Fitch's view.

SUBORDINATED DEBT 

The ratings on the subordinated debt of WHB, BOCHK, ICBC Asia, CCB Asia and 
CNCBI are primarily sensitive to a change in the banks' IDRs, while the ratings 
on similar debt of DSB and CHB are primarily sensitive to a change in the banks' 
VRs.

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'

OCBC Wing Hang Bank Ltd

Long-Term Foreign-Currency IDR affirmed at 'A+'; Outlook Stable

Long-Term Local-Currency IDR affirmed at 'A+'; Outlook Stable

Short-Term IDR affirmed at 'F1'

Viability Rating affirmed at 'a-'

Support Rating affirmed at '1'

Perpetual junior subordinated notes affirmed at 'BBB+'

Bank of China (Hong Kong) Ltd

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

Short-Term IDR affirmed at 'F1'

Viability Rating affirmed at 'a'

Support Rating affirmed at '1'

Senior unsecured securities affirmed at 'A'

Lower Tier-2 subordinated debt affirmed at 'A-'

Industrial and Commercial Bank of China (Asia) Ltd

Long-Term IDR affirmed at 'A' Outlook Stable

Short-Term IDR affirmed at 'F1'

Support Rating affirmed at '1'

Commercial paper programme affirmed at 'F1'

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

Subordinated notes with non-viability clauses affirmed at 'BBB+'

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'

Senior unsecured securities affirmed at 'A'

MTN programme affirmed at 'A/F1'

Subordinated notes with non-viability clauses affirmed at 'A-'

Shanghai Commercial Bank Ltd

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' 

Lower Tier-2 subordinated debt without non-viability clauses affirmed at 'BBB'

Subordinated notes with non-viability clauses affirmed at 'BBB'

Perpetual junior subordinated debt without non-viability clauses affirmed at 
'BB+'

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'

Senior unsecured securities affirmed at 'BBB'

Lower tier-2 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' 

Lower Tier-2 subordinated debt without non-viability clauses affirmed at 'BBB-'

Contact: 

Primary Analyst 

Sabine Bauer (HSB, WHB)

Senior Director

+852 2263 9966

Fitch (Hong Kong) Limited

19/F Man Yee Building

68 Des Voeux Road Central

Hong Kong

Ivan Lin, CFA (BOCHK, ICBC Asia, CCB Asia, SCB, DSB, CNCBI, CHB)

Associate Director

+852 2263 9984

Fitch (Hong Kong) Limited

19/F Man Yee Building

68 Des Voeux Road Central

Hong Kong

Secondary Analyst

Sabine Bauer (BOCHK)

Senior Director

+852 2263 9966

Ivan Lin, CFA (HSB, WHB)

Associate Director

+852 2263 9984

Shanice Lu (ICBC Asia, CCB Asia, SCB, DSB, CNCBI, CHB)

Analyst

+852 2263 9924

Committee Chairperson 

Mark Young

Managing Director

+65 6796 7229

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 

Exposure Draft: Global Bank Rating Criteria  (pub. 14 Apr 2016)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=878147

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