Fitch Affirms Five Small Hong Kong Banks
The Issuer Default Ratings (IDRs) of DSB, SCB and CHB are driven by their standalone creditworthiness, while the IDRs of WHB and DBSHK are driven by institutional support from their respective parents.
The affirmations of DSB, SCB and CHB's IDRs with Stable Outlooks, together with WHB's Viability Rating (VR), reflect Fitch's view that these four banks will maintain adequate intrinsic strength to mitigate pressure from rising China concentration.
WHB and DBSHK's IDRs have been affirmed with Stable Outlooks, based on the agency's view that the ability and propensity of support from their respective parents remain unchanged.
A full list of rating actions is at the end of this rating action commentary.
KEY RATING DRIVERS AND SENSITIVITIES - IDRs and VRs (DSB, SCB and CHB); VR (WHB)
Fitch's assessment captures the banks' growth strategies, healthy liquidity and adequate loss absorption buffers amid prudent regulatory oversight by the authorities. The banks are focused on cross border and onshore expansion to pursue growth due to their limited franchise in Hong Kong, which could expose them to credit losses from a slowdown of the Chinese economy and a potential dislocation of the Chinese banking system.
DSB's risk appetite in China-related lending remains strong, as envisaged in its growing mainland China exposures or MCE (1H14: 27% of total assets; 2010: 13%) in past years. Compared to DSB's domestic and cross-border loans, Fitch considers DSB's onshore MCE activities to be of higher risk, as indicated by the impaired loan ratio of its mainland China subsidiary of around 1.5% at end-2014 (1H14: total impaired loan ratio: 0.4%). Fitch's assessment of DSB's earnings quality and capital generation also take into account the bank's reliance on the high contributions from its stake in Bank of Chongqing (BOCQ, 36% of net profit at end-1H14).
SCB's Fitch Core Capital ratio of about 15% at end-1H14 continues to provide a solid level of loss absorption buffer against a build-up in concentration risk to China, including to regional banks. This, along with steady earnings, will help to differentiate SCB against its peers.
CHB's low profitability weighs on its ratings, particularly as the rental costs of its head office will add about 8% of annualised 1H14 non-interest expenses to its operating costs. Fitch believes CHB will be amongst the faster growing banks in this peer group amid enhanced connectivity in China through its new owner Yue Xiu Group. The bank has been strengthening its risk management capabilities to support the expansion, including unsecured cross-border lending to local government related entities in Guangdong province.
WHB is the second bank in this peer group for which Fitch expects a pick-up in growth due to new ownership. Fitch expects WHB's MCE (30% of assets at end-1H14) to quickly catch up with the system-wide average (34% at end-September 2014) given that it is a key part in the strategic objectives of its 100% parent Oversea-Chinese Banking Corp (OCBC; AA-/Stable). The ratings reflect Fitch's expectation that WHB will uphold stringent risk controls and solid capitalisation.
The banks' VRs, and in turn DSB, SCB and CHB's IDRs, are sensitive to changes in risk appetite. Potential triggers for a downgrade include a different attitude towards risk; for example, if the banks' MCE increases above the system-wide average and a change in the composition of China-related activities without an improvement in risk controls, maintenance of sound capitalisation and supported by stable funding.
DSB, SCB and CHB's ratings are unlikely to be upgraded as Fitch believes thin pricing power and modest franchises will continue to constrain the banks' earnings and capital generation.
Stronger integration with OCBC resulting in a higher level of operational support may be positive for WHB's VR.
KEY RATING DRIVERS AND SENSITIVITIES - IDRs AND SUPPORT RATINGs (WHB AND DBSHK)
The Support Rating (SR) and IDR of WHB reflect Fitch's classification of WHB as a strategically important subsidiary of OCBC, given WHB's ability to contribute to the group's Greater China strategy due to its established Hong Kong franchise. The two entities are in the process of integrating their operations and Fitch expects the linkages could materially strengthen over the next 12-18 months, for example once staff retention agreements expire in January 2016.
DBSHK's SR and IDR take into consideration Fitch's classification of DBSHK as a core subsidiary of DBS Bank Ltd (DBS; AA-/Stable), due to strong integration with the parent in group management control and its key role in the group's expansion strategies in Greater China.
The banks' SRs, and in turn IDRs, are sensitive to a change in Fitch's assessment of either the ability or propensity of their respective parents to extend timely extraordinary support.
Stronger linkages between WHB and OCBC such as integrated treasury, operations, risk management and cross-reference of products and customers could trigger an upgrade in WHB's IDR.
KEY RATING DRIVERS AND SENSITIVITIES - SUPPORT RATINGs AND SUPPORT RATING FLOORs (DSB, SCB and CHB)
The affirmation of SRs and Support Rating Floors (SRFs) of DSB, SCB and CHB, reflect their limited systemic importance with moderate probability of support from the Hong Kong authorities, if needed. Fitch expects to downgrade the banks' SRs to '5' and SRFs to 'No Floor' following the implementation of a resolution mechanism and bail-in tools later this year. Even if the SRs and SRFs were downgraded, there would be no impact on the VRs, and by implication, the banks' IDRs.
KEY RATING DRIVERS AND SENSITIVITIES - SUBORDINATED DEBT
Subordinated debt issued by DSB and CHB are notched down from their VRs (the anchor rating) as the banks' credit profiles are driven by their standalone financial strength. Debt issued by WHB is notched down from its IDR (anchor rating), which reflects the agency's expectation of parental support being made available to the bank. DSB and CHB's debt ratings are primarily sensitive to a change in these banks' VRs, while WHB's debt rating is sensitive to its IDR.
Fitch rates DSB's and CHB's legacy Tier 2 instruments one notch below their respective VRs to reflect their below-average loss severity relative to senior unsecured instruments given their subordination. Fitch also rates DSB's subordinated debt with non-viability clauses and partial write-down features at the same level due to similar recovery prospects, in the agency's view.
The ratings of DSB's and WHB's perpetual junior subordinated debt are notched three levels from their respective anchor ratings - two notches for greater non-performance risk given their interest deferral features and one notch for below-average loss severity.
The rating actions are as follows:
Dah Sing Bank
Long-Term Foreign Currency IDR affirmed at 'BBB+'; Outlook Stable
Short-Term Foreign Currency IDR affirmed at 'F2'
Viability Rating affirmed at 'bbb+'
Support Rating affirmed at '3'
Support Rating Floor affirmed at 'BB'
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+'
Shanghai Commercial Bank Ltd
Long-Term Foreign Currency IDR affirmed at 'A-'; Outlook Stable
Short-Term Foreign Currency IDR affirmed at 'F2'
Viability Rating affirmed at 'a-'
Support Rating affirmed at '3'
Support Rating Floor affirmed at 'BB'
Chong Hing Bank Limited
Long-Term Foreign Currency IDR affirmed at 'BBB'; Outlook Stable
Short-Term Foreign Currency IDR affirmed at 'F3'
Viability Rating affirmed at 'bbb'
Support Rating affirmed at '3'
Support Rating Floor affirmed at 'BB'
Lower tier-2 subordinated debt without non-viability clauses affirmed at 'BBB-'
OCBC Wing Hang Bank Ltd
Long-Term Foreign and Local Currency IDRs affirmed at 'A+'; Outlook Stable
Short-Term Foreign Currency IDR affirmed at 'F1'
Viability Rating affirmed at 'a-'
Support Rating affirmed at '1'
Perpetual junior subordinated notes without non-viability clauses affirmed at 'BBB+'
DBS Bank (Hong Kong) Limited
Long-Term Foreign and Local Currency IDRs affirmed at 'AA-'; Outlook Stable
Short-Term Foreign Currency IDR affirmed at 'F1+'
Support Rating affirmed at '1'
Комментарии