Moody's Affirms Bank of East Asia's Ratings, Highlights Asset Quality Challenges

Moody's Investors Service has issued a news release affirming Bank of East Asia's (BOE) foreign currency and local currency long-term and short-term deposit ratings at A3/P-2. The announcement also affirms the bank's Baseline Credit Assessment (BCA) and Adjusted BCA at baa2, foreign currency and local currency long-term and short-term Counterparty Risk Ratings (CRRs) at A1/P-1 and long-term and short-term Counterparty Risk (CR) Assessment at A1(cr)/P-1(cr). However, Moody's has downgraded BOE's foreign currency subordinate MTN program rating to (P)Baa3 from (P)Baa2 and foreign currency subordinated debt rating to Baa3(hyb) from Baa2(hyb). The rating outlook remains negative.

BOE's strong capitalization and decent pre-provisioning income level have enabled the bank to maintain a buffer against asset risk from its exposures to the Hong Kong property sector and mainland China. The bank has materially reduced its loans to mainland China property developers through loan write-offs and repayments, reducing its exposure to 4.9% of total loans and debt investments as of year-end 2024. However, the asset quality challenge posed by loans to Hong Kong commercial real estate (CRE) and mainland China property remains a concern, with BOE's impaired loan ratio increasing to 2.72% as of year-end 2024.

The negative outlook on BOE's deposit ratings reflects our expectation that the bank will face profitability pressure due to potential loan loss provisions as it resolves its mainland property exposures over the next 12-18 months. Moody's has also applied a one-notch LGF downward adjustment to subordinated debts, from zero notches previously, due to its Advanced LGF analysis indicating low LGF for the bank's junior depositors and senior unsecured creditors.

Key Takeaways:

• Moody's has affirmed BOE's foreign currency and local currency long-term and short-term deposit ratings at A3/P-2, but with a negative outlook due to asset quality challenges and potential profitability pressure.
• BOE's strong capitalization and decent pre-provisioning income level have enabled the bank to maintain a buffer against asset risk from its exposures to Hong Kong property sector and mainland China.
• BOE has materially reduced its loans to mainland China property developers through loan write-offs and repayments, reducing its exposure to 4.9% of total loans and debt investments as of year-end 2024.
• Moody's has applied a one-notch LGF downward adjustment to subordinated debts due to its Advanced LGF analysis indicating low LGF for the bank's junior depositors and senior unsecured creditors.
• BOE's impaired loan ratio increased to 2.72% as of year-end 2024, with the asset risk of Hong Kong CRE remaining elevated amid the prolonged sector downturn.
• BOE's bank's deposit ratings, senior unsecured MTN program rating, CRRs and CR Assessment incorporate a one-notch uplift based on its assumption of a moderate probability of government support from, and a very high dependence with, the Hong Kong government in times of need.

Statistics:

• BOE's impaired loan ratio increased to 2.72% as of year-end 2024.
• BOE's asset risk of Hong Kong CRE remains elevated amid the prolonged sector downturn.
• BOE's Hong Kong CRE exposure was 11.5% of its gross loans as of year-end 2024, moderate compared to some other Hong Kong bank peers.
• BOE's reliance on wholesale funding remains moderate, with a liquidity coverage ratio of 204.6% for the fourth quarter of 2024.
• BOE's tangible common equity (TCE) / Risk Weighted Assets (RWA) increased to 19.3% as of year-end 2024 from 19.1% as of year-end 2023.

Sources:

• Moody's Ratings (Moody's) news release: [Moody's] (2024, November)
• Bank of East Asia, Limited's annual report: [Bank of East Asia, Limited] (2024)
• Moody's Banks methodology: [Moody's] (2024, November)
• Bank of East Asia, Limited's website: [Bank of East Asia, Limited]