Moody's lowers debt rating for 6 banks

Growing risk of bad debts triggers downgrade after the agency sees limited support from the HK government to replenish lenders' capital

PUBLISHED : Friday, 06 September, 2013, 12:00am
UPDATED : Friday, 06 September, 2013, 3:58am

Ratings agency Moody's Investors Service downgraded six Hong Kong banks' subordinated debt ratings in view of the increasing risk of bad debts.

Downgrading the subordinated debt of Bank of China (Hong Kong) (BOCHK), Bank of East Asia (BEA), Wing Lung Bank, Industrial and Commercial Bank of China (Asia), China Citic Bank International and Standard Chartered Bank (Hong Kong), the agency said: "Moody's views the probability of support from the Hong Kong government as having diminished to the point where such support no longer warrants any uplift in banks' subordinated debt ratings."

Moody's said the outlook on the subordinated debt ratings of BEA and Wing Lung Bank, a subsidiary of China Merchants Bank, remained negative, in line with the negative outlook on these banks' deposit and bank financial strength ratings.

The willingness to provide support can change rapidly as costs mount

The outlook on the subordinated debt ratings of BOCHK, Citic, ICBC (Asia) and Standard Chartered were stable, the ratings agency said, indicating a low chance of further downgrades in the short term.

"We recognise that Hong Kong's and the mainland's bank supervisors have in the past acted in a manner to support bank creditors," said Sonny Hsu, a Moody's analyst.

"However, the experience of the global financial crisis has shown that the willingness to provide support can change rapidly as costs mount and losses have been imposed on bank creditors even in the absence of a formal resolution framework. Fears that creditor bail-ins might trigger serious contagion risks have largely not been realised."

Dominic Chan, an analyst with BNP Paribas, said: "Banks in Hong Kong are generally well capitalised. With weaker loan growth now, I don't think they have an urgent need for capital."

He noted that some mainland banks' subsidiaries in the city might witness higher loan growth and require more capital.

Hsu said he agreed some mainland banks needed more capital to support their business growth in Hong Kong. "The costs of them to issue new subordinated debt will be higher, depending on the banks' credit rating," he said.

However, the tax-deductible nature of such debt would allow it to remain a favourable tool for banks to raise capital rather than issuing new shares, Hsu added.