S&P sees more risks on horizon for banks

PUBLISHED : Tuesday, 24 March, 1998, 12:00am
UPDATED : Tuesday, 24 March, 1998, 12:00am

Standard & Poor's yesterday affirmed its ratings on Dao Heng Bank, International Bank of Asia (IBA), GE Capital Finance and Hongkong Bank, but indicated that potential problems remained on the horizon for the financial sector.

The agency, however, revised the outlook of the long-term ratings of Dao Heng, IBA and GE Capital Finance to negative from stable.

The US-based agency said the revisions reflected 'a more difficult operating environment resulting from a slowdown in Hong Kong's economy and heightened systemic risks in the local market'.

The outlook revisions did not apply to Hongkong Bank because it does not have a long-term rating.

Dao Heng's long-term rating was affirmed at BBB+, IBA at BBB and GE Capital at A+.

Meanwhile, Dao Heng's short-term rating was affirmed at A2, IBA at A3, GE Capital at A1 and Hongkong Bank at A1+.

Dao Heng said the revision did not change its ratings so its funding costs would not be affected.

It said the funding costs of financial institutions in Hong Kong had already been increased after the Asian crisis.

It said the agency's move was just a reaffirmation of the supply and demand situation in the credit markets.

GE Capital said S&P's move was purely driven by the agency's own view on the SAR economy and its perceived negative implications on the operating environment of the local banking sector, rather than the company's practices and risk management.

The agency said in a statement increased volatility in the local property and stock markets, rising unemployment, high debt-servicing costs and a subdued retail sector would impact negatively on the banking system's profitability and asset quality in the near term.

It would downgrade the banks' ratings if the economic deceleration was prolonged, property prices dropped further, liquidity was further tightened, interest-rate volatility was renewed and market confidence was diminished.

However, the agency said banks' strong profits and earnings retention in the past and high levels of capital would cushion them against these shocks.

Shares in the banks defied the agency's comments and rose yesterday.

Dao Heng gained $1.25 to close at $24.05. International Bank of Asia put on 12.5 cents to $2.775. HSBC Holdings went up $2 to $234.