Moody's revises HSBC, Hang Seng Bank, and Dah Sing Bank ratings outlook to negative

Business | 17 Mar 2016 7:47 pm

Moody's Investors Service today revised to negative from stable the rating outlook on three Hong Kong banks – the Hongkong and Shanghai Banking Corporation, Hang Seng Bank, and Dah Sing Bank.

The rating action reflects expectations of a more challenging operating environment for banks in Hong Kong, Moody’s noted.

In addition, Moody's has downgraded Bank of East Asia's long-term and short-term deposit ratings to A3/Prime-2 from A2/Prime-1.

Moody's has also downgraded its long-term senior unsecured debt rating to A3; senior unsecured commercial paper rating to Prime-2; and long-term CR assessments to A2(cr). The outlook on all ratings remains negative.

These three banks' current impaired loan ratios are exceptionally low at below 0.6 percent, due to benign operating conditions in Hong Kong since the global financial crisis. However, the expected deterioration in operating conditions will likely lead them to report increases in impaired loans in coming years, Moody’s said.

For HSBC and Hang Seng Bank, their overall performances have been resilient in the last few years. In addition, their earnings could benefit from rises in interest rates. However, Moody's expects any increases in interest rates to be gradual and modest over the next two years.

Moreover, a weakening operating environment in HSBC's and Hang Seng Bank's key markets -- including Hong Kong, China and some other economies in Asia Pacific -- would likely pressure asset quality and profitability from their current strong levels over the next 12-18 months.

Meanwhile, the deposit and senior unsecured debt ratings of Bank of East Asia incorporate multiple notches of support from the Hong Kong government. The downgrade of its deposit and senior unsecured ratings therefore considers that the government's support for the bank could be weaker than what Moody's had previously assessed.

Moody's expectation of the reduced capacity of the Hong Kong government to provide support, as reflected in its negative outlook – and the high level of support

received from the Hong Kong government relative to other Hong Kong banks – led Moody's to lower its support assumption.

In addition, the negative outlook on Bank of East Asia takes into account both the expected weaker operating conditions and potentially lower level of government support, given the likelihood that Hong Kong will adopt a bail-in resolution regime.

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