OREANDA-NEWS. S&P Global Ratings said today that it affirmed its 'A+' long-term and 'A-1' short-term issuer credit ratings on Standard Chartered Bank (Hong Kong) Ltd. (SCBHK). The outlook on the long-term rating remains positive. At the same time, we affirmed the 'cnAAA' long-term and 'cnA-1+' short-term Greater China regional scale ratings on the bank. We also affirmed all the issue ratings on various debts that the bank issued.

"We affirmed the ratings on SCBHK because we currently see the bank continuing to have a high likelihood of extraordinary support from the Hong Kong government if needed," said S&P Global Ratings credit analyst Panpan Bu. "In our view, the government is highly supportive toward the banking sector, and SCBHK has a high systemic importance in the city."

We continue to rate SCBHK one notch above its 'a' stand-alone credit profile (SACP) after factoring in two notches of uplift for government support. We also maintain one notch of negative adjustment on the long-term rating on SCBHK to reflect our view that its creditworthiness will remain closely linked to that of the wider Standard Chartered group. The net result is a rating of one notch above that on its parent bank, Standard Chartered Bank (SCB).

Although the Legislative Council has passed the Financial Institutions (Resolution) Ordinance, some details of the resolution framework and the implementation timeline for the legislation are still uncertain.

In our view, once the financial institution resolution framework in Hong Kong is effectively implemented, the potential for an upgrade of SCBHK would be significantly reduced, although the rating could remain unchanged. In this scenario, we would likely lower our assessment of the Hong Kong government as supportive toward banks, and accordingly view the likelihood of government support for SCBHK reducing to a moderately high level. Consequently, we could cut the extent of rating uplift on SCBHK due to government support to one notch. We would simultaneously remove the one-notch negative adjustment, given that the final rating would remain only one notch above its parent bank.

Our assessment of an SACP of 'a' for SCBHK is mainly based on an 'a-' anchor, and the bank's above-average funding and strong liquidity.

Our 'a-' anchor on SCBHK follows our view of the Hong Kong banking sector. We currently see a negative economic risk trend in the sector. The downside scenario in economic risk could lead to a lowering in our anchor for banks domiciled and predominantly operating in Hong Kong to 'bbb+'. Accordingly, we could also lower our SACP assessment on SCBHK to 'a-'. However, the issuer credit rating on SCBHK could remain unchanged, unless we, at the same time, revised downward our view of the high likelihood of government support and downgrade Hong Kong.

We expect the bank's well-established customer deposit franchise and liquid balance sheet to support its funding, and its liquidity to remain stronger than peers'. We consider the shrinkage of deposit balance in 2015 a result of the bank's intention to contain its funding costs, especially on time deposits, in response to dampened corporate loan demand and the bank's effort to lower risks. We also expect SCBHK to maintain a rich pool of liquid assets and remain a significant net lender in the interbank market.

While the bank's parent group is undergoing some substantial business restructuring and transformation following a change in top management and strategic review in 2015, we expect the effect on SCBHK's business profile to be relatively limited. We believe SCBHK's business and performance will remain quite resilient and continue to maintain its important contribution to the parent group. We also expect the bank to maintain adequate capital and earnings.

"SCBHK's loan growth is likely to remain slow over the next two years, as a result of generally weakened corporate loans demand in Hong Kong and the bank's fairly prudent risk appetite," said Ms. Bu. "We expect its net interest margin to remain tight."

While the bank's nonperforming loans and credit costs could further increase amid the still challenging economic environment, we anticipate its loan quality will remain largely in line with its domestic peers', and stay strong in a global comparison. We believe SCBHK's capital and earnings could remain adequate even if we consider economic risk in Hong Kong to have heightened and we apply higher risk weights to SCBHK's credit exposures in our capital analysis.

The positive outlook on SCBHK mirrors our positive outlook on SCB. We believe the Standard Chartered group's accumulation of additional loss-absorbing capacity is likely to offer increased protection to senior unsecured creditors of the group's operating subsidiaries in the next 12-24 months.

We could raise our ratings on SCBHK if we take a similar action on SCB. In that event, we would remove the one-notch negative adjustment for SCBHK.

We could revise the outlook to stable if we see a reduction in rating uplift from Hong Kong government support. This could happen if we see a reduced likelihood of government support after the effective implementation of the Hong Kong banking sector's resolution regime. This could also happen if we lower our issuer credit rating on Hong Kong. In these scenarios, we could reduce the rating uplift from government support to one notch, and simultaneously removing the one-notch negative adjustment, therefore our long-term rating on SCBHK would remain unchanged and stay at one notch above that of the parent bank.

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