TEXT-Fitch affirms Hang Seng Bank's IDR at 'A+'; outlook stable

(The following statement was released by the rating agency)

Oct 05 - Fitch Ratings has affirmed Hong Kong-based Hang Seng Bank Limited's (HSB) Long-Term Issuer Default Rating (IDR) at 'A+' and its Short-term IDR at 'F1'. The Outlook is Stable. In addition, the agency has affirmed the Viability Rating at 'a+' and the Support Rating at '1'. A full list of rating actions is provided below.

The affirmation reflects Fitch's view that HSB is well positioned to maintain sound liquidity and strong profitability. Its stable margins benefit from the bank's treasury activities and its expansion to mainland China. Lending follows strict underwriting standards, and reserves and collateral are maintained at high levels, notwithstanding that collateral coverage for loans used outside of Hong Kong has more than halved since end-2008. The bank's capitalisation is lower than that of peers, which Fitch considers a weakness relative both to the current rating level and to its concentrated exposures to China and the domestic property market. Fitch's Core Capital (FCC) ratio stood at 10.5% at end-June 2012.

The IDRs reflect the bank's individual financial strength. In addition, they are underpinned by support from the bank's ultimate 62% owner, HSBC Holdings plc (HSBC, 'AA'/Negative). Fitch maintains a two-notch differential between the IDRs of HSBC and HSB to reflect HSB's retained autonomy which results in limited integration and brand recognition. Hence, a downgrade in the VR may not by itself impact the IDRs unless Fitch is of the opinion that the ability and likelihood of HSBC and The Hongkong and Shanghai Banking Corporation Limited (HKSB, HSB's direct owner, 'AA'/Negative) to support HSB has declined.

HSB's VR could come under pressure if its capital is no longer commensurate with the risks it takes, including if it were to loosen underwriting standards for its China exposures. Fitch considers HSB's capital base vulnerable to declines in property values as revaluation gains amounted to 19% of FCC at end-June 2012. In addition there is the risk that risk-weighted assets (RWAs) may increase as borrower quality weakens in an economic downturn.

HSB's mainland activities serve HSBC's overall China strategy as they add scale and diversification. Fitch expects HSB's gross mainland China exposures, USD27bn or 21% of its assets at end-June 2012, to grow moderately in 2013 in line with overall economic growth. The exposures include minority stakes in Chinese banks, lending to Hong Kong customers' expansion into China and vice versa, and onshore subsidiary operations with 43 outlets.

HSB's association with HSBC is well established in Hong Kong and supported by a jointly operated ATM network. It plays a key role in defending HKSB's dominant domestic market position against fast growing Chinese banks through a sizeable deposit base. Both HSB and HKSB accounted for 46.5% of system-wide deposits at end-H112 (HSB alone: 9.8%). Its stronghold on the deposit base will continue to be HSBC's competitive advantage and strategically important for the group's future expansion in Asia-Pacific. HSBC defined Hong Kong, including HSB, as its only other home market in outside the UK.

At end-H112, HSBC provided USD1.2bn subordinated debt to HSB; other related party exposures are limited.

The rating actions of HSB are as follows: - Long-Term IDR: affirmed at 'A+'; Outlook Stable - Short-Term IDR: affirmed at 'F1' - Support Rating: affirmed at '1' - Viability Rating affirmed at 'a+'

((Bangalore Ratings Team, Hotline: +91 80 4135 5898 Debanjali.Ghosh@thomsonreuters.com, Group id: BangaloreRatings@thomsonreuters.com, Reuters Messaging: Debanjali.Ghosh.reuters.com@reuters.net))