Fitch Affirms Five Hong Kong Banks; Outlook Stable

Dah Sing Financial Holdings

10/04/2019 10:20

(The following statement was released by the rating agency)


Fitch Ratings-Hong Kong-April 10: 

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

- OCBC Wing Hang Bank (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 rating actions stem from Fitch's periodic peer review of the Hong Kong 
banks. 

The rating affirmations reflect Fitch's view that the banks will remain 
sufficiently resilient to overcome the headwinds from slower economic growth and 
strong competition. Net profit growth in 2018 was mostly driven by expansion in 
net interest margin (NIM), and we expect banks' profit growth in 2019 to 
primarily be tied to loan growth, assuming more limited scope for NIMexpansion. 
Opportunities within the Greater Bay Area - the area comprising Hong Kong, Macao 
and nine cities in southern mainland China -should result in demand for bank 
credit, but uncertainties over China's trade tensions with the US and slowing 
economic growth in China could pose near-term challenges.

Fintech and digitalisation are becoming important to the banks' strategic 
planning, although they are unlikely to be immediately affected by the Hong Kong 
authorities' move in March to grant several licences for the operation of 
virtual banks, because the Hong Kong banks already compete fiercely via their 
existing electronic banking platforms. The banks' asset quality remains sound, 
but the adoption of HKFRS 9 in 2018 resulted in slight increases in impaired 
loans and provisions last year. Overall, Fitch believes the Hong Kong banks' 
asset quality remains vulnerable to deterioration in their mainland China 
exposures (around 30% of system assets at end-2018) and property-related lending 
(around 12% of system assets), although the risks have so far been balanced by 
the banks' strong loss-absorption buffers and risk discipline, as well as tight 
regulatory oversight.

Key Rating Drivers

IDRS AND VIABILITY RATINGS

OCBC Wing Hang Bank Limited

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 if 
needed. Fitch equalises WHB's Long-Term IDR with that of OCBC due to WHB's 
important and strategic role in Greater China, one of OCBC's core markets, as 
well as the high level of management and operational integration. 
Risk-management practices under OCBC's risk framework have been largely 
implemented at WHB. WHB, including contribution from its Macao and China 
subsidiaries, accounted for about 10% of OCBC's operating profit in 2018.

WHB's Viability Rating (VR) of 'a-' captures the bank's solid company profile, 
as the bank's franchise benefits - in Fitch's opinion - from cross-selling 
opportunities across OCBC's wider networks in North and south-east Asia. WHB's 
loss-absorption buffer remains adequate given the bank's moderate risk appetite, 
with the total regulatory capital adequacy ratio improving slightly to 16.4% by 
end-2018 from 16.1% at end-2017. WHB's gross loan growth of 8% is higher than 
the sector's, and slower deposit growth has resulted in an increase in the 
loan-to-deposit ratio, but asset quality remained satisfactory.

DBS Bank (Hong Kong) Limited

The affirmation reflects Fitch's view of the strong ability and propensity of 
Singapore-based DBS Bank Ltd. (DBS, AA-/Stable/aa-) to extend extraordinary 
support, if required. We equalise DBSHK's IDRs with those of DBS on the basis of 
DBSHK's integral role in supporting DBS's expansion in Greater China. DBSHK has 
a sound record of profit contribution to DBS (2018: 16% of group net profit), 
and its assets accounted for 14% of group assets at end-2018. The consolidated 
management in DBSHK and DBS Hong Kong Branch also demonstrates their high level 
of integration. 

DBSHK's VR primarily reflects the bank's solid franchise, which also benefits 
from parental support. The VR also considers the bank's overall satisfactory 
financial profile and its below-peer proportion of mainland China exposure. 
DBSHK's loans increased by 5.5% in 2018, in line with system loan growth. The 
bank's Fitch Core Capital (FCC) ratio dropped to 15.5% by end-2018 from 17% at 
end-2017, largely due to a larger interim dividend paid during 2018. However, 
Fitch believes DBSHK's current capitalisation level is still in line with that 
of similarly rated peers. 

Shanghai Commercial Bank Limited

While SCB has a more limted franchise and scale compared to most peers, its IDRs 
and VR are supported by the bank's high capitalisation and more conservative 
risk appetite. Loan growth moderated in 2018 after a rapid increase in 2017, and 
SCB continues to maintain a low loan-to-deposit ratio and high collateral 
coverage. The bank's overall loan quality is well-supported by high reliance on 
traditional collateral-based lending and below-peer non-bank China-related 
lending. We expect SCB's core profitability to remain steady, supported by low 
credit costs and high cost efficiency.

Dah Sing Bank, Limited

DSB's IDRs and VR primarily reflect the bank's small franchise, although it has 
a niche in retail lending and presence in China and Macao to complement its 
cross-border business. The ratings also take into account DSB's moderate risk 
appetite and adequate loss-absorption buffers. Overall core profitability 
remained steady, despite an impairment loss on its associate,Bank of Chongqing, 
which weighed on its reported net profit. Thus, we expect DSB's capitalisation 
to remain stable.

Chong Hing Bank Limited

The IDRs and VR 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 had a new strategic investor in 2018: state-owned Guangzhou 
Metro now owns 7.2% in CHB. The new share placement and a rights issue during 
2018 lifted CHB's FCC ratio to 14.9% at end-2018 from 12.7% at end-2017. 
However, given CHB's growth aspirations, we expect the bank to usethe new 
capital for further growth in the next two to three years and so we do not 
expectthe increased capital buffer to be sustained. 

CHB has a high concentration in cross-border lending to the Chinese central 
government (36% of its total non-bank mainland China exposure), likely owing to 
YXG's government ties. The bank's total mainland China exposureincreased 
significantly in recent years to almost 53% of assets by end-2018 (2016: 40%). 
We believe these loans are mostly concentrated in the property, infrastructure 
and transportation sectors, coinciding with YXG's main businesses. Despite its 
high loan growth in the Pearl River Delta region, CHB's average profitability in 
the past four years remained below that of most peers, owing in part toits small 
market share and thus low pricing power as well as low cost efficiency.

SUPPORT RATINGS AND SUPPORT RATING FLOORS

The Support Ratings of '1' for WHB and DBSHK reflect their parents' respective 
ability and propensity to support their subsidiaries. Fitch equalises the IDRs 
of WHB and DSBHK with those of their parents, as we view the Hong Kong 
subsidiaries as important platforms for their parents' overseas expansion 
strategy and a default would have a large impact on the parents' reputations.

The Support Rating of '5' and SRF of 'No Floor' for SCB, DSB and CHB reflect our 
view that senior creditors of the banks in Hong Kong 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 to warrant factoring in 
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 VRs (which are the same as their IDRs)to reflect their below-average 
recovery prospects as they 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' VRs due to their partial 
write-down features.

Rating Sensitivities

IDRS AND VIABILITY RATINGS

The banks' VRs are sensitive to changes in the banks' franchises and business 
models, including changes in their China strategies, as well as changes in their 
risk appetites over the composition of their China-related activities. The pace 
of loan expansion,without maintaining stringent risk controls, could trigger 
downgrades in the banks' ratings. Maintenance of stable asset quality, 
sufficient capitalisation and healthy liquidity are the key variables that will 
support the banks' ratings at the current levels.

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 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-termchangesinour sovereign support assessment for SCB, 
DSB and CHB. A reinstatement or an upward revision of the SRFs would be 
contingent on an increase in the Hong Kong government's propensity to support 
its banks. This is highly unlikely in Fitch's view given implementation of the 
resolution regime in 2017.

SUBORDINATED DEBT (DSB, CHB, SCB)

The ratings on the subordinated debt are primarily sensitive to changes in the 
banks' VRs.

DBS Bank (Hong Kong) Limited; Support Rating; Affirmed; 1

; Viability Rating; Affirmed; a-

; Short Term Issuer Default Rating; Affirmed; F1+

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

Dah Sing Bank, Limited; Support Rating; Affirmed; 5

; Viability Rating; Affirmed; bbb+

; Support Rating Floor; Affirmed; NF

; Short Term Issuer Default Rating; Affirmed; F2

; Long Term Issuer Default Rating; Affirmed; BBB+; RO:Sta

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

OCBC Wing Hang Bank Limited; Support Rating; Affirmed; 1

; Viability Rating; Affirmed; a-

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

; Short Term Issuer Default Rating; Affirmed; F1+

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

Shanghai Commercial Bank Limited; Support Rating; Affirmed; 5

; Viability Rating; Affirmed; a-

; Support Rating Floor; Affirmed; NF

; Short Term Issuer Default Rating; Affirmed; F2

; Long Term Issuer Default Rating; Affirmed; A-; RO:Sta

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

Chong Hing Bank Limited; Support Rating; Affirmed; 5

; Long Term Issuer Default Rating; Affirmed; BBB; RO:Sta

; Short Term Issuer Default Rating; Affirmed; F2

; Support Rating Floor; Affirmed; NF

; Viability Rating; Affirmed; bbb

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

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

Secondary Rating Analyst

Grace Wu, 

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: 
wailun.wan@thefitchgroup.com; Yee Man 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: Short-Term Ratings (pub. 22 Mar 2019)

https://www.fitchratings.com/site/re/10061058

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https://www.fitchratings.com/site/dodd-frank-disclosure/10068980

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https://www.fitchratings.com/site/pr/10068980#solicitation

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https://www.fitchratings.com/regulatory

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