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 rating is negative. At the same time, we affirmed our 'cnAA+' long-term and 'cnA-1' short-term Greater China regional scale ratings on the banks. We also affirmed all the ratings on BEA's debt.

"We affirmed the ratings on BEA to reflect the bank's established franchise in Hong Kong and its adequate capitalization," said S&P Global Ratings credit analyst Panpan Bu. "However, we expect the bank's loan quality to remain under pressure amid the economic slowdown in China."

We continue to see a moderately high likelihood that the government of Hong Kong would extend extraordinary support to the bank in a stressed scenario.

We expect BEA to continue to benefit from its established franchise in Hong Kong and its position as the fifth-largest bank in Hong Kong by total assets. We also anticipate that BEA will maintain its modest loan and deposit market shares, thanks to its established branch network and long operating history. The bank remains one of the five "Domestic Systemically Important Authorized Institutions" designated by the Hong Kong Monetary Authority. We continue to see BEA as a bank with a moderate systemic importance in Hong Kong.

We currently apply two notches of uplift to the ratings on BEA above its 'bbb+' unsupported group credit profile, its intrinsic creditworthiness before considering extraordinary support. Once Hong Kong's Financial Institutions (Resolution) Ordinance is implemented, we are likely to revise our assessment of government support to supportive, from highly supportive. This revision would result in a reduction in the uplift to one notch and therefore a downgrade of BEA by one notch.

BEA's loan quality is likely to remain under pressure over the next 12-24 months amid the continuing economic slowdown and rebalancing in China. BEA's impaired loan ratio rose to 1.23% at the end of June 2016, from 1.13% at the end of 2015. This was largely due to the bank's exposure to China, where its impaired loan ratio increased to 2.80%, from 2.63%. This ratio rose to 0.49%, from 0.34%, for the Hong Kong loan book. BEA's loans to the property sector--in both Hong Kong and China--remain a significant proportion of its loan book, and therefore the concentration risk remains. We expect the bank's credit costs to continue rising but remain comparable to the industry average in the key markets it operates in, i. e., Hong Kong and mainland China. We expect that narrowing interest margins and rising credit costs will continue to strain BEA's profitability over the next 12-24 months.

"We continue to view BEA China as a core subsidiary of BEA. We therefore equalize the ratings on BEA China with those on BEA," said Ms. Bu. BEA China represents a significant portion of BEA group, accounting for over 30% of the group's net worth at the end of December 2015. We no longer maintain a stand-alone credit profile assessment on BEA China.

The negative outlook on BEA and BEA China mainly reflects a one-in-three chance that we could downgrade the banks due to a lower likelihood of Hong Kong government support in the coming two years. The outlook also reflects the banks' weakening asset quality.

We could lower our ratings on BEA and BEA China by one notch if we believe the likelihood of extraordinary support from the Hong Kong government has reduced. This could happen upon the effective implementation of the financial institutions resolution regime in Hong Kong. We could also lower our ratings if BEA's loan quality deteriorates more severely than the respective industry average in Hong Kong or China.

We could revise the outlook on BEA and BEA China to stable if BEA's group credit profile, before considering external support, strengthens such that it offsets the pressure of reducing government support. Although unlikely, we could raise the rating if BEA builds and sustains its risk-adjusted capital ratio above 10%.