OREANDA-NEWS. S&P Global Ratings said today that it had affirmed its 'A' long-term and 'A-1' short-term issuer credit ratings on The Bank of East Asia Limited (BEA) and its Chinese subsidiary, The Bank of East Asia (China) Limited (BEA China). The outlook on the long-term ratings is negative. At the same time, we affirmed the 'cnAA+' long-term and 'cnA-1' short-term Greater China regional scale ratings on the banks. We also affirmed all the issue ratings on various debts that the banks issued.

"We affirmed the rating on BEA because we continue to see a moderately high likelihood of extraordinary support from the Hong Kong government to the bank," said S&P Global Ratings credit analyst Panpan Bu. "We still view BEA China as a core subsidiary of BEA and are therefore equalizing our ratings on the subsidiary to that on the parent."

However, the ratings are now under further negative pressure due to a potential reduction in the likelihood of government support for BEA following the recent passing of the Financial Institutions (Resolution) Ordinance in the Legislative Council. This is in addition to our view of the ongoing strain from rising economic risks in mainland China and Hong Kong.

In our view, the Hong Kong government remains highly supportive towards the banking sector under the current progress of the resolution framework. On this basis, we apply a two-notch uplift to the ratings on BEA and BEA China, above their 'bbb+' unsupported group credit profile.

Once the ordinance is implemented, we are likely to revise our assessment of government support to supportive from highly supportive, and therefore downgrade BEA by one notch. This is subject to the final details of the implementation of the financial institutions resolution framework in Hong Kong. In particular, the implementation timeline of the ordinance, the final form of certain subsidiary legislation, and relevant regulations have yet to be clarified.

Our consideration also takes into account the issuer credit rating on Hong Kong (Special Administrative Region) (Hong Kong, AAA/Negative/A-1+; cnAAA/cnA-1+). Our negative outlook on the rating on Hong Kong under the current circumstances does not affect the ratings on BEA.

Our assessment of BEA's 'bbb+' unsupported group credit profile is mainly based on a 'bbb+' anchor, while other bank-specific factors have a neutral rating impact.

We expect BEA to maintain an adequate level of capital and earnings over the next two years, as reflected in the bank's risk-adjusted capital (RAC) ratio that is comfortably within the range of 7%-10%.

We also do not expect any rating impact on BEA from management's ongoing dispute with Elliott Management Corp., an activist investor with around 7% stake in BEA, based on current information.

"The negative outlook on BEA and BEA China mainly reflects a one-in-three chance that we would reduce our rating uplift from Hong Kong government support, and therefore downgrade BEA by one notch, upon an effective implementation of the financial institutions resolution regime in Hong Kong in the next two years," said Ms. Bu.

The outlook also reflects our view of ongoing negative pressure on BEA's unsupported group credit profile stemming from growing economic risks in the banking sectors in Hong Kong and mainland China, and a more significant shift in BEA's loan mix towards mainland China than our base-case forecast.

We could lower our rating on BEA and BEA China by one notch if we believe the likelihood of extraordinary support from the Hong Kong government has reduced to a moderate level, from the current moderately high level. This could happen upon the effective implementation of the financial institutions resolution regime in Hong Kong.

We could also lower the ratings if BEA's unsupported group credit profile deteriorates. This could happen if we lower our anchor rating on BEA under a scenario where we revise our economic risk assessments on both Hong Kong and mainland China to a weaker category, and, at the same time, there is an unexpected shift in BEA's loan book towards China. This could also happen if the group's asset quality deteriorates to a much more significant level than we expected.

We could revise the outlook on BEA and BEA China to stable if, in an unlikely scenario, we see BEA's unsupported group credit profile strengthen by one notch, such that it offsets the pressure of reducing government support on the bank's overall credit profile. This could happen if the bank undertakes further substantial capital issuances, such that we believe its RAC will stay comfortably above 10%, even after taking into account its credit risk exposures.