Fitch Affirms Three Macao Banks
The affirmation of TFB's Viability Rating (VR) at 'bbb-' is based on the agency's view that the bank will maintain adequate intrinsic strength, moderate loss-absorption capacity and satisfactory profitability.
A full list of rating actions is at the end of this rating action commentary.
KEY RATING DRIVERS - IDRS AND SUPPORT RATING
Fitch has affirmed TFB's IDRs and Support Rating (SR) to reflect our opinion of a high probability of support from its Chinese parent Bank of China Ltd. (BOC, A/Stable), should this be required. We classify TFB as a subsidiary of limited importance to its 50.3%-owned parent, with a two-notch difference between TFB's and BOC's IDRs. This is due to TFB's low level of business integration with the parent; BOC's relatively low ownership stake; significant management independence; and different branding identity. Retail banking remains the bulk of TFB's business, and differentiates itself from BOC's Macao branch which is the largest bank in Macao.
ICBC Macau's IDRs and SR reflect Fitch's view that its 89.3%-owner Industrial and Commercial Bank of China (ICBC, A/Stable) has an extremely strong propensity to support ICBC Macau, and would be able to do so - as indicated by its rating and the relative size of the two entities. Fitch views ICBC Macau as a core subsidiary of ICBC, as it plays a key role in ICBC's overseas expansion strategies - characterised through strong business integration, alignment of risk appetite, centralised risk management and brand identity. Group support is also evident in plans for ICBC's upcoming capital injection of USD360m.
The affirmation of BWH's IDRs and SR reflect Fitch's view that BWH is of strategic importance to its ultimate 100% parent Oversea-Chinese Banking Corp (OCBC, AA-/Stable), as it complements OCBC's business in the greater China region. The assessment also takes into account BWH's high integration with its direct Hong Kong-based parent OCBC Wing Hang Bank Ltd (WHB, A+/Stable) in terms of business operation, risk controls and liquidity management. Fitch maintains a one-notch difference between BWH's and OCBC's IDRs, as stronger operational support, business synergies and the effect from future management secondments are likely to take more time to become fully effective.
The Stable Outlooks on the three banks are in line with the Outlook on their respective parents' IDRs.
KEY RATING DRIVERS - VR (TFB)
TFB's VR captures its adequate intrinsic profile. We see its risk appetite for property-related lending as strong, with annual growth of 37% in 2014. The bank's less-diversified business model, which is manifested in its high property concentration at 30% of assets at end-2014, renders its asset quality susceptible to potential property-price correction. Collateral and guarantee (2014 loan-to-value ratio: 58%) can help the bank withstand volatility in the operating environment.
TFB's Fitch Core Capital (excluding property revaluation reserve) had decreased to 9.1% by end-2014 from 9.8% at end-2013, as fast asset growth has outpaced its internal capital generation. The affirmation also reflects Fitch's expectation that TFB will boost its regulatory core capital ratio through the issuance of Basel II-compliant preference shares. These notes would only partially alleviate capital pressure from growth as they do not qualify as core capital under Fitch's criteria. We would, however, include them at 50% equity credit in our Fitch Eligible Capital analysis - due to their permanence, subordination and loss-absorption features.
Profitability is supported by volume growth, despite the non-loan contribution being small relative to peers. Funding continues to be stable, with a 77% loan/deposit ratio at end-2014. TFB's mainland China exposure amounted to 16% of assets at end-2014, of which 86% are non-bank exposures driven by property-related lending.
RATING SENSITIVITIES - IDRS AND SUPPORT RATINGS
The banks' IDRs and SRs are sensitive to any change in assumptions around the propensity or ability of their respective parents to provide timely support.
For TFB and BWH, this could arise with a stronger integration with their parents, usually underpinned by stronger group management control, operational support and similar risk-management practices.
ICBC Macau's IDRs are sensitive to weakening support from ICBC.
RATING SENSITIVITIES - VR (TFB)
TFB's VR is sensitive to a shift in risk appetite towards riskier businesses such as commercial properties and China-related lending without adequate loss-absorption capacity and strengthened risk management. Negative rating action would be taken if pressure on capital were to persist due to fast loan growth, or higher concentration risks were to weaken asset quality and profitability.
TFB's VR would be upgraded if the bank were to diversify business composition, exhibit a better-managed risk appetite and demonstrate through-the-cycle resilience in capitalisation, asset quality and profitability. However, these developments are not currently envisaged amid its concentrated business model and pressure on capital.
KEY RATING DRIVERS AND SENSITIVITIES - SUBORDINATED DEBT
ICBC Macau's subordinated debt is rated one notch below its IDRs to reflect higher loss severity relative to senior unsecured instruments, in light of their subordination. The use of ICBC Macau's IDRs as the anchor rating reflects the agency's view that support from ICBC would be made available to the note if needed. As such, the subordinated debt ratings are broadly sensitive to the same considerations that might affect ICBC Macau's IDRs.
The rating actions are as follows:
Tai Fung Bank
Long-Term Foreign-Currency IDR affirmed at 'BBB+'; Outlook Stable
Short-Term Foreign-Currency IDR affirmed at 'F2'
Viability Rating affirmed at 'bbb-'
Support Rating affirmed at '2'
ICBC Macau
Long-Term Foreign-Currency IDR affirmed at 'A'; Outlook Stable
Short-Term Foreign-Currency IDR affirmed at 'F1'
Support Rating affirmed at '1'
Subordinated notes affirmed at 'A-'
Banco OCBC Weng Hang
Long-Term Foreign-Currency IDR affirmed at 'A+'; Outlook Stable
Short-Term Foreign-Currency IDR affirmed at 'F1'
Support Rating affirmed at '1'
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