Fast Growth for Hong Kong Subsidiaries of Mainland Banks Will Lead to Changes in Their Credit

Moody's Investors Service says that the agency expects the five rated Hong Kong subsidiaries of Mainland banks to grow their loans faster than other Hong Kong banks, as they are at the fore of the industry trend of increased lending to Mainland corporate borrowers.


Growing Mainland exposures at the five banks are changing their credit profiles in terms of customer franchise, loan mix, liquidity position and capitalization.


The five banks are Bank of China (Hong Kong) Limited (Aa3 stable, a2 stable), China CITIC Bank International Limited (Baa2 stable, baa3 stable), China Construction Bank (Asia) Corp. Ltd. (A2 stable, a3 negative), Industrial & Commercial Bank of China (Asia) Limited (A2 stable, baa2 negative), and Wing Lung Bank (A3 negative, baa1 negative).


"The impact of such loan growth and increasing Mainland exposures leads us to maintain negative outlooks on three of the five banks' standalone credit assessments. Among them, we consider BOC Hong Kong as being the least affected by growing Mainland exposures and Wing Lung Bank the most," says Sonny Hsu, a Moody's Vice President and Senior Analyst.


Hsu was speaking on the release of a new credit focus entitled "Peer Comparison of Five Hong Kong Subsidiaries of Mainland Banks."


The Moody's report states that economic and regulatory factors will continue to drive the Hong Kong banking system's -- and thus the banks' -- growing Mainland exposures.


"Mainland corporates' growing need for cross border funding, the lower borrowing costs they can get in Hong Kong relative to China, and bank lending quotas and other restrictions in the Mainland all provide them with incentives to borrow offshore from Hong Kong banks," says Hsu.


For Hong Kong subsidiaries of Mainland banks, their engagement in offshore lending also allows their parents to serve their corporate customers' offshore borrowing needs, thus serving a broader strategic purpose from their parents' perspective.


Moody's expects ICBC Asia and CCB Asia to report the fastest growth among these banks. Rapid loan and overall asset growth will stretch these two banks' standalone liquidity profiles.


However, as these two banks lend to some of the largest Mainland state-owned enterprises and private-sector corporates, and a material portion of their loans are guaranteed by their respective parents, they are likely to maintain relatively sound asset quality metrics. These two banks also benefit from very strong expected capital and liquidity support from their respective parents.

Moody's also expects Wing Lung Bank and China CITIC Bank International to grow their Mainland exposures strongly. Compared to ICBC Asia and CCB Asia, they lend less to blue-chip and the largest Mainland corporates, which exposes them to greater credit risks.


On the other hand, the two banks are likely to maintain more conservative standalone liquidity profiles and rely less on wholesale funding compared to ICBC Asia and CCB Asia.


When compared with the other four banks, BOC Hong Kong has been more conservative in growing its exposures to Mainland borrowers. Moody's expects the bank to maintain a conservative liquidity profile and strong capitalization, which should leave it the least impacted in the event of a slowdown in Mainland growth.