(Alliance News) - Moody's Investor Service on Tuesday affirmed the Aa2/P-1 deposit ratings of HSBC Holdings PLC's Hong Kong banking subsidiaries HSBC Hong Kong and Hang Seng Bank.
The credit ratings agency lowered the outlook for the lenders to Negative, however.
In the same action, Moody's also affirmed HSBC HK and Hang Seng Bank's baseline credit assessment and adjusted BCA at a1.
"The affirmation of HSBC HK's a1 BCA and adjusted BCA takes into account its sound asset quality, track record of prudent risk management, strong capitalization and very good liquidity," Moody's said.
The agency continued: "Nevertheless, the change in the bank's outlook to Negative from Stable takes into account a more difficult operating environment in Hong Kong and the rest of the region amid a slowdown in economic growth.
"Recurring protest in Hong Kong is undermining consumption and inbound tourism. Meanwhile, elevated trade tensions between the US and mainland China have led to increased economic uncertainty in the region. 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."
Hang Seng's affirmation was due to its "well-established market position", Moody's said. The agency also cited the lender's sound capitalization, good asset quality, above-peer profitability, and strong deposit-gathering franchise.
The reason given for the lowered outlook was similar to that of HSBC HK: the "more difficult" operating environment in the region. Moody's expects the increased volatility in Hong Kong to hurt the lenders asset quality and profitability.
"That said, both HSBC HK and Hang Seng Bank retain exceptionally strong asset quality metrics," Moody's added.
The agency continued: "More than half of both HSBC HK and Hang Seng Bank's overall Hong Kong lending are to the real estate sector, and credit risks on such lending are low due to conservative loan-to-value ratios and good credit profile of borrowers. Outside of Hong Kong, the highly geographically diversified nature of HSBC HK's lending renders its asset quality less susceptible to deterioration in any particular market."
Moody's also noted the "loyal retail customer base" for reasons for optimism, as the lenders in the region focus on deposit-led strategies, under which customer lending in each country is largely funded by local customer deposits.
A bigger cause for concern, Moody's noted, are declining interest rate margins.
Moody's said: "Rising interest rates contributed to HSBC HK and Hang Seng Bank's profitability in recent years. Both banks' profitability benefits from strong contributions from fee-based income and low credit costs. However, Moody's expects declining net interest margins and rising credit costs to weigh on the banks' profitability in 2020."
Shares in HSBC Holdings were 1.3% higher in London on Tuesday at 592.90 pence each.
By Paul McGowan; paulmcgowan@alliancenews.com
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