U.S. markets closed

Moody's changes outlook of HSBC's China, Hong Kong units to negative as protests, trade war threaten profits

Enoch Yiuenoch.yiu@scmp.com

Moody's Investors Service has changed its rating outlook for HSBC Bank China from "stable" to "negative" after doing the same to its parent earlier in the week, as the bank faces a difficult operating environment amid civil unrest in Hong Kong and the US-China trade war.

The change to negative means the ratings on HSBC units are unlikely to be upgraded, Moody's explained in a statement released on Thursday.

However, it said there is no change to the A1 rating of HSBC China's long-term foreign and local currency issuers and deposit ratings. It said these enjoyed a "very high level of affiliate support from the parent in times of need, and are aligned with the parent's baseline credit assessment (BCA).

"Therefore, any changes in the parent's ability to provide support to the bank, as reflected by a change in the parent's BCA, could negatively impact the bank."

Moody's on Tuesday changed the rating outlook of the Hongkong and Shanghai Banking Corp, the wholly owned subsidiary of HSBC and the largest lender in Hong Kong, from "stable" to "negative". It did the same to its subsidiary Hang Seng Bank, which is also a large retail bank in Hong Kong.

The rating agency, however, kept both banks' deposit ratings at Aa2/P-1 citing their sound asset quality and prudent risk management. But it changed their outlook to negative because of the challenging operating environment in Hong Kong and the rest of Asia, which contributes most of HSBC's profit.

Protest chaos leads to widespread bank branch closures

"Recurring protests in Hong Kong are undermining consumption and inbound tourism. Meanwhile, elevated trade tensions between the US and mainland China have led to increased economic uncertainty in the region," Moody's said in a statement. "Both developments will put pressure on the bank's asset quality and profitability, and weigh negatively on Moody's assessment of the bank's BCA."

The change in Hang Seng Bank's outlook was also a result of the slowdown in economic growth in Hong Kong, and the expected impact on the bank's asset quality and profitability, Moody's added.

Moody's said, however, that both HSBC and Hang Seng Bank's problem-loan ratios were low, at just 0.5 per cent and 0.2 per cent respectively in the first half of this year.

"Lending to the small-and-medium-sized enterprises in the retail, restaurant and hospitality sectors, which are most impacted by the protests, account for a relatively modest proportion of the two banks' overall lending in Hong Kong," Moody's added. More than half of both banks' lending is to the real estate sector, which carries low credit risks, it said.

Both HSBC and Hang Seng Bank declined to comment on Moody's decision.

Louis Tse Ming-kwong, managing director of VC Asset Management, disagreed with the move by the ratings agency.

"Moody's decision to change the outlook of HSBC and Hang Seng Bank is short-sighted," he said. "There are protests everywhere, while Hong Kong is not alone. The financial market and banking sector has held up well, and investors are still investing in the city for the long-term growth. The outlook of HSBC and Hang Seng Bank are positive for the longer term."

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2020 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2020. South China Morning Post Publishers Ltd. All rights reserved.