Fitch takes a dimmer view of Hongkong Bank

PUBLISHED : Saturday, 03 March, 2012, 12:00am
UPDATED : Saturday, 03 March, 2012, 12:00am


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Credit rating agency Fitch has revised its view of Hongkong Bank to 'negative' from 'stable' yesterday, but retained the bank's long-term default rating.

This comes a day after Fitch revised its view of the bank's parent HSBC to 'negative'.

Hongkong Bank's dominant market position in the city was being challenged by intense competition from mainland and foreign banks and 'defending it may come at a cost', said Sabine Bauer, a director in Fitch's financial institutions team.

'Loan demand and fee-generating activities from outside of Hong Kong, in particular from China, will likely address structural pressure on profitability,' Bauer said.

Fitch is keeping its long-term default rating of HSBC's local lending arm at 'AA'. However, the bank's increased risk tolerance and rapid expansion into emerging markets without an appropriate increase in capital and profitability could lead to a rating downgrade, Bauer said.

Fitch said Hongkong Bank's mainland exposure had more than doubled to exceed US$100 billion in the last two years, adding that the mainland's banking system was overshadowed by corporate governance and risk mitigation issues.

Despite the bank's solid financial performance, its net interest margins, a measure of its lending profitability, were expected to remain under pressure, with subdued domestic loan demand, Fitch said.

The net interest margins for HSBC's Asian operations outside of Hong Kong stood at 2.1 per cent last year, compared with 1.35 per cent for Hongkong Bank's domestic operations, said Fitch.

That largely reflects margin compression in the city due to competition and the low-interest-rate environment.

Fitch said eight other Hong Kong banks also faced competition and risks arising from expanding into the mainland, but they had generally maintained conservative collateral, capital and liquidity buffers to cope with unexpected losses.

These banks include Hang Seng Bank, Bank of China (Hong Kong), and Wing Hang Bank.