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Moody's downgrades Chiyu Banking following change of ownership

Moody's downgraded Chiyu Banking Corp. Ltd.'s ratings following the completion of Bank of China (Hong Kong) Ltd.'s sale of its stake in the bank.

The rating agency downgraded Chiyu Banking's long-term and short-term deposit ratings to Baa1/P-2 from A2/P-1, concluding its review for downgrade initiated Dec. 5, 2016.

Bank of China (Hong Kong), a unit of Bank of China Ltd., on March 27 completed the sale of its 70.49% stake in Chiyu Banking to Xiamen International Investment Ltd. and the Committee of Jimei Schools for HK$7.69 billion.

The ratings action was driven by uncertainties following the bank's change of ownership, as well as the challenging operating environment and the bank's small size and modest franchise.

The ratings action also incorporates Moody's expectations that the bank will no longer benefit from affiliate support uplift due to Xiamen International Investment's lower capacity to provide support.

In addition, Moody's downgraded the bank's stand-alone baseline credit assessment to "baa1" from "a3," adjusted baseline credit assessment to "baa1" from "a2," and long-term and short-term counterparty risk assessments to A3(cr)/P-2(cr) from A1(cr)/P-1(cr).

The outlook on Chiyu Banking was changed to stable, suggesting that the bank does not face immediate pressure on its baseline credit assessment.

Moody's does not expect Chiyu Banking to see immediate deterioration on its asset quality and capital buffers given that the lender plans to maintain prudent growth strategy following the change of ownership.

Chiyu Bank's ratings could be upgraded if it maintains strong capitalization and sound asset quality, while also improving its franchise and market position.

On the other hand, the bank's baseline credit assessment could experience downward pressure if there is a substantial decline in the bank's core capital ratio, as associated with strong asset growth. A significant deterioration in the bank's asset quality metrics or difficulties arising from the integration process could also result in a ratings downgrade.