Hong Kong Mortgage Corporation Ltd. (The) -- Moody's affirms HKMC's issuer rating at Aa3 with stable outlook

Rating Action: Moody's affirms HKMC's issuer rating at Aa3 with stable outlookGlobal Credit Research - 25 Feb 2022Hong Kong, February 25, 2022 -- Moody's Investors Service ("Moody's") has affirmed The Hong Kong Mortgage Corporation Ltd. (HKMC)'s Aa3 long-term and P-1 short-term issuer ratings.Moody's has also affirmed HKMC's Baseline Credit Assessment (BCA) at a2, long-term senior unsecured rating at Aa3, long term senior unsecured MTN program rating at (P)Aa3, and short-term program rating at (P)P-1.The entity-level outlook on HKMC's ratings is stable, reflecting Moody's expectation that the company will maintain its strong credit fundamental and receive very strong support from the Hong Kong government in the next 12-18 months.RATINGS RATIONALEThe affirmation of HKMC's Aa3 issuer rating with stable outlook and a2 BCA takes into account the company's prudent risk management, robust capitalization and conservative liquidity management with extraordinary support from the government of Hong Kong SAR, China. Moody's also factors in HKMC's exposure to the Hong Kong housing market, the relatively low-risk nature of residential mortgages in Hong Kong, and potentially lower profitability and higher risks from its annuity and infrastructure financing businesses compared to the company's traditional businesses.HKMC's long-term ratings are aligned with those of the Hong Kong government given the government's full ownership of the company and its public policy mandates, broad representation of government officials and legislators on its board of directors, and ongoing and expected extraordinary government support during times of stress. The Exchange Fund further injected HKD2.5 billion of capital into the company to support the annuity business in June 2021 and increased its Revolving Credit Facility to HKD80 billion from HKD30 billion in October 2020.The company reported losses on its annuity businesses in recent years due to its conservative approach of maintaining sizable statutory reserves against annuities sold. Nevertheless, the embedded value of its annuity business stood at HKD8.1 billion as of 30 June 2021, indicating it is a sustainable business in the long term. Moody's also expects strong growth in its infrastructure financing business, which accounted for 3% of its total assets at the end of 2020, with HKMC planning to grow the business prudently. The company has been careful with project selection since 2019, and works with a number of multilateral financial institutions and commercial banks to source projects for its infrastructure financing business.Although HKMC generates sound profitability from its mortgage lending operations, its reserves against annuities sold and booking of upfront expenses on mortgage insurance underwritten amid the significant surge in new business since 2019 have weigh on its current profitability. Adjusting for amortization of upfront mortgage insurance expenses and excluding the accounting losses in its annuity business, the company's return on equity would have been 6.0% in H1 2021.HKMC has consistently maintained strong capitalization. The company acquired about HKD60 billion of government-backed 100% SME guarantee loans, on which it takes no credit risks from April 2020 to mid-June 2021. Excluding these loans from the company's total assets, its tangible common equity/tangible managed assets would be around 20%. The company's mortgage insurance and annuity subsidiaries retain exceptionally strong solvency ratios.As a wholesale-funded entity with no customer deposits, HKMC relies on access to the debt capital market to fund its operations. Nevertheless, the company has a policy of pre-funding its expected asset purchases and maintains very strong liquidity during normal economic conditions. The company had sufficient liquid assets, including access to the HKD80 billion government revolving credit facility, to repay all of its outstanding debt as of the end of June 2021.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSHKMC's ratings could be upgraded if the Hong Kong government's rating is upgraded.The company's BCA is high, taking into account its geographic concentration and the risks associated with its annuity and infrastructure financing businesses, and is unlikely to be adjusted higher.HKMC's ratings could be downgraded if the Hong Kong government's rating is downgraded.The company's BCA could be lowered if its annuity business weighs significantly on its profitability and capitalization; unexpected losses on its mortgages, mortgage insurance book and annuity business erode a significant portion of its capital; the credit facility from the Exchange Fund is withdrawn; the company is instructed to carry out policy functions that weaken its financial profile; and there is a decline in the company's capital adequacy ratio to less than 14% or an increase in its impaired loans to 1.5% of its total loans.The methodologies used in these ratings were Finance Companies Methodology published in Novermber 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1187099, and Government-Related Issuers Methodology published in February 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1186207. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies. The Hong Kong Mortgage Corporation Ltd., headquartered in Hong Kong, reported total assets of HKD143.2 billion as of 30 June 2021.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. 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