S&P: DBS Bank (Hong Kong) Ltd. 'AA-/A-1+' Ratings Affirmed; Outlook Stable
We equalize the rating on DBSHK with our 'aa-' group credit profile on the DBS group to reflect the bank's status as a core subsidiary of the group. We expect the banking sector regulator in Singapore to allow the DBS group to provide timely and strong support to its Hong Kong subsidiary.
We believe that DBSHK is essential to the group's overseas strategy and geographical diversification. DBSHK operates in key business lines aligned with the group, and is integral to the regional aspirations of DBS. DBSHK generates stable revenue from net interest income and fee income, which consistently contribute about 75%-80% of its total revenue. The bank has been expanding its offshore Chinese renminbi business by leveraging on the DBS group's franchise and regional connectivity.
We expect the DBS group's Hong Kong business to continue to be significant for the group. DBSHK accounts for about 15% of the group's total capital as of December 2015. We estimate DBSHK's risk-adjusted capital (RAC) at about 15% by the end of 2015. Despite some earnings pressure stemming from rising credit losses amid the slowdown in the China economy, we expect the bank's moderate business growth and reasonable earnings retention to continue to support its capitalization. We believe such strong capitalization provides a good buffer against potentially higher economic risk that Hong Kong banks could face.
DBSHK is fully integrated with the group in terms of operations and risk control. We believe that DBSHK has a good track record of managing credit risk in the past several years. We have seen some asset quality deterioration since 2015 especially related to sharp depreciation in the Chinese renminbi, but we expect this to stabilize. We expect DBSHK to contain its potential credit losses through prudent underwriting standards and risk management capabilities.
In our view, DBSHK's focus on customer deposits should continue to support its stable funding profile. Customer deposits consistently contribute 80%-90% of the bank's total funding base. DBSHK has limited reliance on external wholesale funding. We also believe DBSHK has ample liquid assets that act as a buffer against liquidity needs in times of stress.
We no longer maintain a stand-alone credit profile assessment on DBSHK. We also do not consider DBSHK's systemic importance in Hong Kong, as the most relevant external support to the bank is from its parent group. DBSHK is not one of the five domestic systemically important authorized institutions (D-SIBs) designated by the Hong Kong Monetary Authority.
The stable outlook on DBSHK reflects the outlook on the bank's parent, DBS Bank Ltd. (AA-/Stable/A-1+; axAAA/axA-1+). We expect that DBSHK will remain a core subsidiary of the DBS group over the next one to two years.
The ratings on DBSHK would move in tandem with that on the parent. An upgrade of DBS could trigger a similar action on DBSHK.
We could lower the rating on DBSHK if we downgrade DBS or if we no longer consider DBSHK to be a core subsidiary of the DBS group.