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Fitch downgrade of BEA credit rating linked to outbreak

The Bank of East Asia (BEA) yesterday became the first local lender to have its credit rating downgraded because of the economic fallout from the Sars outbreak.

BEA managers were not available for comment but a spokeswoman for the bank said it was reviewing the downgrade by Fitch Ratings. The international ratings agency warned that other banks could follow.

'While the negative impact of Sars may not in itself be strong enough to bring down local banks' credit ratings, it will add to pressures they already face and hence makes downgrades more likely,' Fitch said.

The downgrade of BEA, Hong Kong's fourth-largest lender, stands in sharp contrast to last week's report by rival agency Moody's Investors Service, which gave Hong Kong's credit a clean bill of health despite expectations that Sars would crimp economic growth this year.

Moody's saw no impact on Hong Kong's sovereign or corporate credit ratings due to the Sars outbreak as long as it was brought under control within three to six months. It said Hong Kong banks were healthy and unlikely to face severe financial distress.

The Sars outbreak has prompted a decline in tourism and consumer spending and is expected to trigger a spike in the jobless rate. Several banks and ratings agencies have cut their economic growth forecasts for Hong Kong since the outbreak began.

'Sars will not only affect consumer lending, which will be affected by rising unemployment as personal bankruptcies revive, but Sars will also affect corporate and commercial lending,' said Arthur Lau, a banking analyst at Fitch. 'Banks' asset quality will be subject to pressure this year in the overall banking system.'

In BEA's case, Fitch cut its individual rating to C from B/C and changed its outlook to negative. Its long-term senior debt rating was affirmed at A-minus.

'Although BEA's overall financial conditions remain sound, its prospects are clouded by low profit growth, a high cost base and potential additional provisions to cover falling asset values,' Fitch said.

But BEA was not alone in facing a tough operating environment, Mr Lau said. 'We estimate profits [at Hong Kong banks] will decline 10 to 20 per cent on average this year,' he said. 'Revenue growth will be extremely limited because credit demand will be extremely weak and there is limited room to cut expenses because many banks have already done that over the past few years. Loan provisions are likely to increase due to a deterioration in asset quality.'

The Hong Kong Monetary Authority's annual report yesterday also warned of a challenging year ahead, although it did not specifically address Sars. 'The general expectation is that loan demand will remain subdued and the profit margin from consumer loan products, such as mortgages and personal loans, will continue to be squeezed due to keen competition,' it said.

Fitch also downgraded the outlook on Hongkong and Shanghai Banking Corp's long-term senior debt rating to negative from stable yesterday, following the ratings agency's downgrade of Hong Kong's sovereign rating last week.

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