Moody’s upgrades HSBC’s China unit on asset quality and strong capitalisation, revises outlook to stable from negative
The ratings agency cites HSBC China’s lower-than-average, bad loan ratio and strong capitalisation
Moody’s Investors Service on Tuesday upgraded HSBC China’s baseline credit assessment (BCA) to baa2 by one notch, citing its lower-than-average bad loan ratio and strong capitalisation, while also
changing the rating outlooks of both HSBC China and Hang Seng Bank China to stable from negative.
Moody’s also affirmed the long-term deposit rating of HSBC Bank at A1, and that of Hang Seng Bank China at A2.
“The upgrade of HSBC China’s BCA to baa2 from baa3 is driven by the bank’s track record of sound asset quality as well as capitalisation, and robust funding profile, despite a relatively small franchise when compared to Chinese state-owned and joint-stock commercial banks,” Moody’s said in a statement.
HSBC China reported sound asset quality metrics compared with the system average, the ratings agency said, as it benefited from the focus on serving large and financially strong customers, including multinational companies, selective state-owned enterprises, and medium-sized firms.
By the end of 2016, HSBC China’s non-performing ratio was 0.63 per cent, slightly up from 0.43 per cent at the end of 2015 – but much lower than the system average of 1.74 per cent as of year-end 2016.
Further, the upgrade reflected HSBC China’s “consistently strong capitalisation” in the past few years, as its parent group has injected capital, and the company itself has also been good at generating internal capital due to growth of risk-weighted assets.
However, Moody’s said HSBC China has strained profitability, due to increased operating costs to support its expansion in the Pearl River Delta and its high credit concentration to large borrowers.
“Its high borrower concentration in serving multinational and large corporations benefits its asset performance, but also exposes it to potential losses due to its small customer base when compared to other rated Chinese banks,” it said.
Moody’s also affirmed Hang Seng China’s BCA at ba1, taking into account the bank’s “weak profitability, strained asset quality, and high concentration to large borrowers”.
The move came days after Moody’s downgraded the long-term deposits ratings, adjusted BCAs, and BCAs of the two banks’ parents – HSBC and Hang Seng Bank. Moody’s, meanwhile, changed HSBC and Hang Seng Bank’s rating outlooks to stable from negative.
Moody’s has factored in “a very high level of affiliate support” into the China units of HSBC and Hang Seng China, as they have strategic importance to their respective parents and the potential for reputational risks to their parents through name association if they default, it said.
Last month, S&P Global Ratings lowered its rating on the China units of HSBC, Hang Seng Bank, and DBS Bank, after cutting China’s sovereign credit rating for the first time since 1999 due to soaring debt risks.