Moody’s downgrades Dah Sing Bank ratings due to CRE weakness

Investing.com -- Moody’s Ratings has downgraded Dah Sing Bank, Limited’s long-term foreign and local currency deposit ratings to A3/P-2 from A2/P-1, with a stable outlook.

The rating agency also lowered the bank’s Baseline Credit Assessment (BCA) and Adjusted BCA to baa1 from a3, along with downgrading several other ratings including its Counterparty Risk Assessment and Counterparty Risk Ratings.

According to Moody’s, the downgrades reflect deteriorating asset quality at the Hong Kong-based bank, primarily due to weakness in the commercial real estate (CRE) sector in Hong Kong SAR, China.

The outlook has been changed to stable from negative, considering several factors that could help buffer against further asset quality pressure over the next 12-18 months. These include well-secured collateral for a significant portion of the bank’s lending to property developers, improved profitability and capital adequacy, and stable funding and liquidity.

Moody’s expects continued strain on the asset quality of the bank’s Hong Kong CRE exposures over the next 12-18 months, citing the high interest rate environment, high vacancy rates, increasing office supply, and declining rental yields.

Loans to CRE made up 21% of the bank’s gross loans as of end-2024. The credit impaired ratio for loans to property investment jumped to 8.98% at end-2024, compared to 1.98% at end-2023. This contributed to an increase in the bank’s overall impaired loans, which rose to 3.21% of gross loans at end-2024 from 1.94% at end-2023.

Stage 2 loans also increased to 13.6% of total loans at end-2024, up from 8.2% at end-2023, primarily driven by CRE-related loans. Moody’s anticipates more stage 2 loans will become impaired loans, resulting in higher asset risk.

The bank’s profitability is expected to remain stable in 2025, supported by an improved net interest margin and higher non-interest income from bancassurance and trading activities. This should offset some negative impact from increased loan loss provisions. The bank’s return on average assets improved to 0.8% in 2024 from 0.7% in 2023.

Capital position is projected to remain good over the next 12-18 months due to muted growth in loans and risk-weighted assets. The Common Equity Tier 1 ratio increased to 16.9% at end-2024 from 16.2% at end-2023.

Funding and liquidity are expected to remain sound, with the bank primarily funded by retail customer deposits. As of end-2024, approximately 90% of its total liabilities were customer deposits, a level that was high among its peers.

Moody’s could upgrade Dah Sing Bank’s ratings if the bank reduces its CRE exposure, improves asset quality with problem loans below 1.5% on a sustained basis, strengthens capital adequacy, maintains sound profitability, and preserves a good liquidity profile.

Conversely, a downgrade could occur if capitalization falls significantly, asset quality deteriorates further with impaired loan ratio exceeding 5%, or profitability declines substantially.

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