Shacom Bank face profit strains amidst elevated asset risk

Moody’s Ratings has changed the bank’s outlook to negative.

Shanghai Commercial Bank (Shacom Bank) is facing profit strains amidst deteriorating loans, lower net interest margins, and anticipated higher costs.

Moody’s Ratings has changed Shacom Bank’s outlook to negative, warning of downward pressure on the bank’s credit profile stemming from a further deterioration in asset quality.

This will strain the bank's profitability due to higher credit costs, the ratings agency warned, the ratings agency said in a report where it affirmed the bank’s A1 long-term local currency and foreign currency deposit ratings.

However, the bank is expected to maintain its sound capitalisation, strong liquidity, and a low reliance on market funds. These have reportedly provided a buffer against weakening profitability and deteriorating asset quality that the bank has experienced so far.

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Loan risks
Asset risk is expected to remain elevated amidst challenging operating environments in Hong Kong and China. 

“Rising impaired loans, combined with a declining loan loss allowance, could lead to increased provisioning needs, potentially exerting pressure on the bank's profitability over the next 12 months,” Moody’s said in a report. 

“Additionally, the loss given default is also likely to rise if the property downturn is prolonged in Hong Kong, depressing collateral values,” it added.

The bank's impaired loan ratio rose to 2.84% as of the end of 2023, from 0.86% as of the end of June 2023. This was due to deteriorating credit profiles of Shacom Bank’s small and medium-sized enterprise (SME) borrowers and property-related lending. 

Property investment and property development lending accounted for 17% of the bank's total loans for use in Hong Kong. 

Shacom Bank’s impaired loan coverage ratio was low, at 15% as of end December 2023, Moody’s said. 

The bank’s US loans also face stress due to slow property market recovery, higher sustained interest rates and lower occupancy in the US, Moody’s Ratings noted. US loans constituted 29% of its loan book as of the end of 2023.

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Funding, liquidity sound
On a more positive note, Moody’s expects Shacom Bank’s capital position to remain strong over the next 12-18 months thanks to muted growth in risk-weighted assets (RWA).

Moody's also anticipates that the bank's internal capital generation will remain sound, albeit lower, and that its low dividend payout ratio will help preserve its capitalization.

Shacom Bank’s funding will also remain sound and its liquidity extremely strong, according to Moody’s. 

“The bank is predominantly funded by customer deposits, albeit from a relatively concentrated deposit base. SCB's liquidity ratio, as measured by liquid banking assets to tangible banking assets, was 52% as of the end of December 2023, the highest level amongst its rated Hong Kong bank peers,” the ratings agency said.