In the financial news for a long time, on March 27, Moody's confirmedDah Sing BankLimited company (Dah SingBank, Limited, referred to as "Dah Sing Bank") "A2" long-term deposit ratingVolkswagen Bank(Hong Kong) Limited (Public Bank (Hong Kong) Limited, referred to as "Volkswagen Bank (Hong Kong)") "A3" long-term deposit rating, and Chiyu Bank Limited (Chiyu Banking Corporation, Ltd., referred to as "Chiyu Bank") "Baa1" long-term deposit rating, and adjusted the outlook of the three banks from "stable" to "negative".
A list of all affected ratings and assessments is shown at the end of the article.
Rating basis
The rapid spread of COVID-19, the deterioration of the global economic outlook, falling oil prices and asset prices have caused serious and extensive credit shocks in many industries, regions and markets. Because of its high exposure, the banking industry in Hong Kong, China is one of the industries hardest hit. Moody's believes that within its environmental, social and governance (ESG) framework, COVID-19 is a social risk that has a significant impact on public health and safety.
This unprecedented shock has dampened economic activity in Hong Kong, China, and hurt business and consumer sentiment and labour market conditions. The economy of Hong Kong, China has become fragile amid global trade tensions and weak demand from mainland China.
Moody's expects the shock and low interest rates for a long time to put pressure on banks' asset quality and profitability as the impact of COVID-19 on the economy continues.
The outlook for the affected banks is "negative", reflecting Moody's view that the biggest asset risk faced by banks in Hong Kong is their exposure to small and medium-sized enterprises, unsecured consumer financing and rent-purchase loans, all of which are highly vulnerable to recession and weakening labour market fundamentals. As a result, banks with a higher proportion of such exposures will face greater asset quality and profit pressure. In some cases, the financial position of the affected banks is weaker than that of interbank banks with the same (BCA) level of basic credit assessment.
Banks with relatively strong loan growth in recent years, particularly in mainland China, face the risk of immaturity in their loan portfolios, making them more vulnerable to COVID-19.
Although banks' loans to small and medium-sized enterprises are usually secured by real estate, when the mortgage value decreases, a sharp adjustment in real estate prices may increase the default rate and low recovery rate of loans to small and medium-sized enterprises. Rising property prices remain a key risk to the banking system in Hong Kong, China, and a sharp adjustment will put pressure on personal wealth, private consumption and economic growth.
At the same time, installment loans for banks' taxis and public light buses are vulnerable to serious licence price adjustments, while unsecured consumer loans are vulnerable to deteriorating labour market conditions. This may lead to higher loan impairment charges and impairment loan balances.
Individual bank rating basis
Dah Sing Bank
Dah Sing Bank has a large exposure to small and medium-sized enterprises and is in a weaker financial position than its peers with the same BCA.
The change in outlook reflects that Dah Sing's asset quality and profitability may deteriorate as the impact of COVID-19 on the economy continues. According to Moody's advanced relief loss (LGF) analysis framework, Dah Sing Bank's deposit rating is "A2", one sub-level higher than the bank's "A3" adjusted BCA. In view of the small market share of government deposits in Hong Kong, China, the rating does not include a government-supported upgrade.
Volkswagen Bank (Hong Kong)
Volkswagen Bank (Hong Kong) has considerable exposure to installment loans and unsecured consumer loans, which have been severely affected by the outbreak of COVID-19.
The change in outlook reflects a potential deterioration in its asset risk and profitability indicators due to the rising tail risk of its exposure. The bank's "A3" adjusted BCA includes the parent company, Malaysia Volkswagen Bank (Public Bank Berhad, referred to as "Volkswagen Bank", A3 stable, BCA: "A3") a very high level of subsidiary support, which makes its adjusted BCA one sub-level higher than the BCA of "baa1". Its "A3" deposit rating does not include LGF or the upward adjustment supported by the government of Hong Kong.
Jiyu Bank
In the past three years, Jiyu Bank's loan growth rate has been higher than the industry level, which makes it face the risk of immaturity and makes the bank more vulnerable to the outbreak of COVID-19. Compared with the interbank banks with the same BCA level, the financial position of Jiyu Bank is also weaker.
The change in outlook reflects the potential deterioration of asset quality and profitability of Jiyu Bank. Its "Baa1" deposit rating does not include LGF or the upward adjustment supported by the government of Hong Kong, China.
Moody's has no governance concerns about the affected banks, whose governance practices follow those set out in the Act governing their respective entities.
Factors that may lead to a rating upgrade
Given the "negative" rating outlook of the banks, Moody's is unlikely to upgrade. However, if these banks maintain good credit indicators, in line with their current ratings and assessments, and their operations in Hong Kong, China improve, then their outlook may turn to "stable".
For Jiyu Bank, if the bank maintains good asset quality indicators, current capital adequacy levels and good liquidity conditions while loan growth slows, then the bank's outlook may become "stable".
Factors that may lead to a downgrade
If the above-mentioned banks'(1) serious deterioration in operating conditions, (2) a serious decline in asset quality and profitability, or (3) a decline in secondary or senior instruments related to tangible bank assets, resulting in increased risk of deposit losses and senior unsecured debt downgrades, then their ratings and assessments may be downgraded.
If Volkswagen Bank's BCA rating is downgraded, or its willingness to support Volkswagen Bank (Hong Kong) weakens, then Volkswagen Bank (Hong Kong)'s adjusted BCA and deposit ratings may also be downgraded.
If Jiyu's continued strong loan growth increases the risk of immaturity and reduces capital adequacy ratios, then the bank's rating and rating may also be downgraded.
Dah Sing Bank Limited, headquartered in Hong Kong, had total assets of HK $233 billion at the end of June 2019.
Volkswagen Bank (Hong Kong) Limited is headquartered in Hong Kong and has total assets of HK $43 billion as of the end of June 2019.
Chiyu Bank Limited, headquartered in Hong Kong, had total assets of HK $142 billion as of the end of June 2019.
List of affected ratings and assessments
Dah Sing Bank Limited:
Long-term deposit rating (foreign currency and local currency), confirm A2, outlook adjusted from "stable" to "negative"
Short-term deposit rating (foreign currency and local currency), confirm Pmur1
Advanced unsecured medium term Notes Plan (Foreign currency), confirmation of (P) A2
Subprime medium-term Bill Plan (foreign currency), confirmation of (P) Baa1
Long-term counterparty risk rating (foreign currency and local currency), confirming Aa3
Short-term counterparty risk rating (foreign currency and local currency), confirm Pmur1
Long-term and short-term counterparty risk assessment, confirming Aa3 (cr) / PMI 1 (cr)
Secondary (foreign currency), confirm Baa1 (hyb)
BCA and adjusted BCA, confirm A3
The outlook is adjusted from "stable" to "negative".
Volkswagen Bank (Hong Kong) Limited:
Long-term deposit rating (foreign currency and local currency), confirm A3, outlook adjusted from "stable" to "negative"
Short-term deposit rating (foreign currency and local currency), confirm Pmur2
Long-term counterparty risk rating (foreign currency and local currency), confirm A2
Short-term counterparty risk rating (foreign currency and local currency), confirm Pmur1
Long-term and short-term counterparty risk assessment, A1 (cr) / Pmur1 (cr)
BCA, confirms baa1
Adjusted BCA, confirms A3
The outlook is adjusted from "stable" to "negative".
Chiyu Bank Limited:
Long-term deposit rating (foreign currency and local currency), confirming that the Baa1, outlook has been adjusted from "stable" to "negative"
Short-term deposit rating (foreign currency and local currency), confirm Pmur2
Long-term counterparty risk rating (foreign currency and local currency), confirm A2
Short-term counterparty risk rating (foreign currency and local currency), confirm Pmur1
Long-term and short-term counterparty risk assessment, confirm A1 (cr) / Pmur1 (cr)
BCA and adjusted BCA, confirm baa1
The outlook is adjusted from "stable" to "negative".