Moody’s Investors Service has changed the outlooks for the bank financial strength ratings (BFSRs)/Baseline Credit Assessments (BCAs) of eight Hong Kong banks to negative from stable, and one bank’s BFSR outlook to stable from positive.
In addition, Moody’s has lowered Wing Lung Bank’s BFSR by one notch, and affirmed all other ratings of the nine banks.
Moody’s has affirmed the deposit ratings of all the nine banks involved in this rating action. However, it has changed the outlooks on the deposit ratings for five of the nine banks concerned to negative from stable, while those for the other four banks are unchanged at stable.
The rating actions follow Moody’s decision to revise the outlook for Hong Kong’s banking system to negative from stable.
The change in the banking system outlook reflects the agency’s concerns regarding persistent negative real interest rates and potential property bubbles in Hong Kong, as well as Hong Kong banks’ growing exposures to Mainland China. These factors could result in adverse operating conditions for Hong Kong banks over the outlook horizon.
Residential, commercial, and industrial property prices in Hong Kong have all more than doubled since 2009 and are currently at historically high levels. There is growing integration between Hong Kong’s economy with that of the Mainland. While the economic integration creates business opportunities for banks and their customers, it also entails risks. The Mainland’s transition from an export- and investment-driven economic growth model to a consumption-led model creates uncertainties and may expose overcapacity in certain industries.
A separate press release to be published today elaborates on the rationale for the change in the banking system outlook.
All of the nine affected banks reported problem loan ratios that were at or near historically low levels at end-2012, and their current asset quality metrics compare very favorably against global peers. However, latent risks are building in the banking system, as domestic leverage increases and the exposures to the Mainland grow.
Moody’s anticipates a turning point during the outlook horizon when these banks’ problem loans will rise from current low levels as conditions become more challenging. While the precise timing of the turning point cannot be determined with precision, a tightening of US monetary policy, which directly affects Hong Kong via the Hong Kong dollar peg, is likely to be one trigger for a cyclical deterioration in asset quality.
At end-2012, local property-related lending, trade and export finance, and Mainland exposures together accounted for more than half of the banks’ total loans.
Nevertheless, Hong Kong banks remain among the highest-rated banks globally, and their credit ratings continue to reflect strengths such as solid levels of capitalization, sound funding profiles and liquidity positions, and established retail franchises.
Four of the nine rated banks affected by this rating action are subsidiaries of Mainland banks. Most of them have grown at a faster pace than their peers owing to customer referrals from their parents. Their Mainland corporate exposures are higher than the peer average, as they serve the offshore financing needs of their parent banks’ corporate customers. The change in outlook for these banks’ BFSRs takes into account these banks’ increasing integration with their parents and the fact that the quality of their Mainland exposures have not been fully tested in an economic downturn.
The negative outlooks on deposits for five of the nine banks reflect the negative outlooks on their BFSRs. The outlooks for the other four banks are stable owing to expected strong support from these banks’ overseas and Mainland parents, which would likely mitigate downward pressure on their standalone credit quality.
The Hong Kong subsidiaries are of strategic importance to their overseas and Mainland parents, given Hong Kong’s position as a major regional financial hub, and the overlap in customers between the subsidiaries and their parents.
The subordinated debt ratings of four of the nine banks incorporate elements of systemic support, as they are currently notched off the banks’ deposit ratings.