Hong Kong, May 24, 2017 -- Moody's Investors Service has today taken rating actions on 5 Chinese commercial banks, 3 policy banks, and 5 bank owned leasing companies.
Moody's has affirmed the A1 long-term deposit ratings of Bank of China Limited (BOC), China Construction Bank Corporation (CCB), and Industrial and Commercial Bank of China Limited (ICBC). Moody's has also downgraded Agricultural Bank of China Limited's (ABC) long-term deposit rating to A2 from A1, and put Bank of Communications Co., Ltd (BoCom)'s A2 long-term and P-1 short-term deposit ratings on review for downgrade.
At the same time, Moody's has affirmed BOC, CCB, and ICBC's baseline credit assessment (BCA) and Adjusted BCA at baa2, and ABC's BCA and Adjusted BCA at baa3, and put BoCom's BCA and Adjusted BCA of baa3 on review for downgrade.
Moody's has also downgraded the long-term issuer ratings and/or senior unsecured debt ratings of three Chinese policy banks, Agricultural Development Bank of China (ADBC), China Development Bank Corporation (CDB), and the Export-Import Bank of China (CEXIM), to A1 from Aa3.
Moody's has also affirmed the A1 long-term issuer ratings of CCB Financial Leasing Corporation Ltd (CCB Leasing) and ICBC Financial Leasing Co., Ltd (ICBC Leasing), put the A2 long-term issuer rating of Bank of Communications Financial Leasing (BoCom Leasing) and the A3 long-term issuer rating of BoCom Leasing Development HK Co. Ltd. (BLDHK) on review for downgrade, and downgraded the long-term issuer rating of China Development Bank Financial Leasing (CDB Leasing) to A1 from Aa3.
The outlook on all entities except for BoCom, BoCom Leasing and BLDHK, which are on review for downgrade, have been revised to stable from negative.
Moody's has today also downgraded China's sovereign rating to A1 from Aa3 and changed outlook to stable from negative. For full details on China's sovereign rating action, please refer to the webpage: http://www.moodys.com/viewresearchdoc.aspx?docid=PR_366139.
Please click on this link http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_195681 for the List of Affected Credit Ratings. This list is an integral part of this Press Release and identifies each affected issuer.
RATINGS RATIONALE
Please click on this link http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_195681 for the List of Affected Credit Ratings. This list is an integral part of this Press Release and provides, for each of the credit ratings covered, Moody's disclosures on the following items:
Principal Methodologies
Local Market Analyst
Lead Analyst
National Scale Ratings
BCA affirmation for BOC, CCB, ICBC, ABC
The affirmation of BOC, CCB and ICBC's BCA at baa2 and ABC's BCA at baa3 takes into account the potential risks in these banks' lending books, their restrained loan growth relative to their rated Chinese peers, stable capitalization, and the modest decline in their profitability. The affirmation also takes into consideration their relatively strong funding and liquidity profiles compared with smaller peers.
The four banks are among the largest banks in China, and have strong relationships with the largest Chinese corporate borrowers. The largest Chinese corporate enterprises, including most of the central government-owned enterprises, tend to have stronger standalone financial profiles and are more likely to benefit from government support relative to the mid-sized corporates in China, which lowers their likelihood of default.
The four banks also reported relatively modest balance sheet growth in 2016 when compared with smaller banks. Their more conservative growth should entail lower credit risks going forward. Moreover, these four banks have been less active in structuring, distributing and investing in wealth management products than other rated banks in China. They are therefore less vulnerable to the spillover effects from the ongoing tightening of regulatory controls on the shadow banking sector than smaller banks.
Even though asset quality pressure will likely persist for these banks, the recent stabilization of economic growth and improvement in commodity sectors should reduce the formation of new problem loans over the next 12-18 months. That said, over the medium and longer term, the Chinese economy will continue to face the challenges associated with the combination of rising economy-wide leverage and slower growth, which will in turn weigh on these banks' credit profiles.
The four banks have also maintained stable capitalization, with tangible common equity / risk weighted assets ratio. The banks' reasonably good capitalization and relatively good pre-provision profitability should help them absorb the expected formation of distressed loans.
Although narrowing margins and increased provisioning expenses have led to a modest decline in profitability for these banks, we expect the declining trend in these banks' profitability to remain manageable, with no material negative impact on their credit profiles.
Although liquidity conditions in China have tightened amid a steady increase in interbank rates, these four banks still have some of the strongest liquidity profiles among rated Chinese banks. They have extensive branch networks and are net lenders in the interbank market. They are likely to benefit from "flight to quality" during periods of liquidity stress.
Review for downgrade for BoCom's BCA and adjusted BCA
The review for downgrade for BoCom's BCA and adjusted BCA will focus on assessing the impact of the rise in its reliance on wholesale funds in recent years and decline in profitability.
Moody's note that while ABC, BOC, CCB, and ICBC have continued to enjoy stable funding profiles, BoCom has relied to a growing extent on wholesale funds in recent years to support its operation, which Moody's considers to be a less stable funding source than retail deposits.
The bank's greater reliance on wholesale funding also subjects its profitability to greater downward pressure as wholesale funding costs rise.
Support consideration for ABC, BOC, BoCom, CCB, and ICBC
The sovereign rating action has not had an impact on the credit ratings of BOC, CCB, and ICBC. We continue to factor in very high level of government support in their ratings, resulting in four notches of government support uplift in their deposit and senior unsecured ratings. The downgrade of China's sovereign rating to A1 from Aa3 has not affected the notching under our Joint Default Assessment (JDA) framework for these three banks.
We also incorporate very high support assumption in ABC's deposit rating. However, the five notches of support uplift previously incorporated into ABC's ratings are no longer consistent with our JDA framework, given the one-notch downgrade of China's sovereign rating. As a result, ABC's long-term deposit and long-term senior unsecured debt ratings were downgraded to A2 from A1.
The stable outlooks for the big four banks reflect Moody's view that the central government's willingness to support them will remain broadly unchanged over the next 12-18 months, and that these banks' BCAs will remain appropriately positioned at their current levels during this period.
We continue to incorporate a very high support assumption and four notches of government support uplift in BoCom's deposit rating. The review for downgrade of BoCom's deposit ratings reflects the review for downgrade of its BCA and adjusted BCA.
Downgrade of policy bank ratings; Outlook revised to stable
The downgrade of the three policy banks is mainly driven by their very close linkages with the sovereign's credit quality. These banks are currently rated using the credit substitution approach, and their ratings are on par with the sovereign rating. The Chinese government fully owns the three banks, either directly through the Ministry of Finance or indirectly through its investment platform companies. The State Council has assigned the three banks development / policy finance roles of supporting economic growth and structural adjustments, implying a prolonged alignment of interests and objectives between the three banks and the government. The three banks function under the control and directives of the government, with their operations and finances inextricably intertwined with those of the government.
The stable outlooks for the policy banks reflect Moody's view that the central government's ability and willingness to support them will remain broadly unchanged over the next 12-18 months.
Affirmation of CCB Leasing and ICBC Leasing, review for downgrade for BoCom Leasing and BLDHK, and downgrade of CDB Leasing
The affirmation of CCB Leasing and ICBC Leasing's A1 long-term issuer ratings factors in these companies' ba3 standalone credit strength and eight notches of uplift based on the expected implicit and explicit support from their parents.
The review for downgrade for BoCom Leasing's A2 long-term issuer rating and BLDHK's A3 long-term issuer rating follows similar rating action on BoCom.
The downgrade of CDB Leasing's long-term issuer rating to A1 from Aa3 follows similar rating actions on its parent CDB. Following the rating action, the company benefits from eight notches of support uplift from its standalone assessment of ba3.
ICBC Leasing, CCB Leasing, BoCom Leasing and CDB Leasing's long-term issuer ratings are in line with the deposit/senior unsecured ratings of their respective parents, and are based on their strategic importance to and linkages with their parents. These entities are either fully or majority-owned by their respective parent banks. The parent banks of these firms have provided considerable support in the form of business referrals, risk management systems, information platforms, capital injections and funding access. Moody's believes that the amount of extraordinary parental support the leasing firms would receive under a situation of stress is very high. The affirmation, review for downgrade, and/or downgrade of the parents' ratings have led to similar rating actions on their respective leasing subsidiaries.
The one-notch differential between the A2 issuer rating of BoCom Leasing and the A3 keepwell-supported issuer rating of BLDHK reflects (1) the absence of a direct guarantee, and (2) the potential risks associated with obtaining approval to remit funds, given China's capital regulations.
ABC, BOC, CCB, ICBC: WHAT COULD MOVE THE RATINGS UP/DOWN
The ratings of ABC, BOC, CCB, and ICBC incorporate a very high level of government support. The long-term deposit ratings of BOC, CCB, and ICBC are already at the sovereign level of A1 and are unlikely to rise. The deposit rating of ABC could be upgraded if there is an upgrade of its BCA or a sovereign upgrade.
These banks' BCAs could experience upward pressure if (1) the growth in leverage in the Chinese economy is arrested and shadow banking risks are contained, thereby reducing latent risks for the banking sector ; (2) asset quality, as measured by new problem loan formation, and profitability, as measured by return on assets, remain resilient; and (3) capital strengthens, with improvement in the common equity Tier 1 ratio.
The ratings could be downgraded if China's sovereign rating is downgraded or if Moody's assesses that the China government's ability or willingness to support the banks has weakened. The BCAs of ABC, BOC, CCB, and ICBC could experience downward pressure if (1) the operating environment weakens materially, for example if China's economic growth moderates, or corporate financial leverage continues to rise; (2) asset quality and profitability weaken materially; and (3) capital weakens, with deterioration in the common equity Tier 1 ratio.
BOCOM: WHAT COULD MOVE THE RATINGS UP/DOWN
In view of the review for downgrade of the ratings for BoCom, Moody's does not expect any upward ratings pressure.
The bank's BCA and deposit ratings could be downgraded if Moody's review results in (1) no expectation of a material improvement in its reliance on market funds despite a more stringent regulatory environment; or (2)expectations that its profitability, as measured by return on assets, will continue to weaken..
An affirmation of its BCA and deposit ratings could be considered if Moody's concludes that : (1) its liquidity profile improves, such that its reliance on market funds decreases; and (2) its profitability will remain resilient despite increasing market funding costs.
ADBC, CDB, CEXIM: WHAT COULD MOVE THE RATINGS UP/DOWN
The ratings of the three policy banks are in line with China's sovereign rating. Their ratings will be upgraded if (1) China's sovereign rating is upgraded; and (2) support to these banks remains a government priority despite ongoing reforms in some policy banks.
The ratings could be downgraded if (1) China's sovereign rating is downgraded; (2) changes in their policy role diminish their strategic importance to the government; or (3) the government substantially reduces its ownership in the banks.
CCB LEASING, CDB LEASING AND ICBC LEASING: WHAT COULD MOVE THE RATINGS UP/DOWN
The ratings of these three leasing companies are aligned with those of their parents. Their issuer ratings are unlikely to rise unless there is an upgrade on their parents' ratings.
Moody's would consider raising the leasing companies' standalone credit strength if they maintain good asset quality, reduce the tenor mismatch between their assets and liabilities, improve their profitability, and strengthen their capital ratios relative to their managed assets.
Any negative rating actions on the parents of the leasing companies could lead to negative rating actions on the leasing subsidiaries. The ratings of the leasing companies could also be downgraded if Moody's observes (1) weakening liquidity and capital support from the parents; (2) declining business relationships and management control of the parent bank; or (3) significant reduction of the parents' shareholding in their leasing subsidiaries.
The leasing companies' standalone credit strength could be downgraded in the event of deteriorating asset quality and rising credit costs, weakening liquidity and funding profiles, and/or weakening capital levels.
BOCOM LEASING AND BLDHK: WHAT COULD MOVE THE RATINGS UP/DOWN
Since BoCom's ratings are under review for downgrade, rating actions on BoCom would therefore likely result in rating actions on the leasing subsidiaries.
The ratings of BoCom Leasing could also be downgraded if the support from the parent bank weakens.
BLDHK's rating could be downgraded if there is a material adverse change in capital account regulations that limits BoCom Leasing's ability to provide timely cross-border support to BLDHK to meet payment obligations.
Moody's National Scale Credit Ratings (NSRs) are intended as relative measures of creditworthiness among debt issues and issuers within a country, enabling market participants to better differentiate relative risks. NSRs differ from Moody's global scale credit ratings in that they are not globally comparable with the full universe of Moody's rated entities, but only with NSRs for other rated debt issues and issuers within the same country. NSRs are designated by a ".nn" country modifier signifying the relevant country, as in ".za" for South Africa. For further information on Moody's approach to national scale credit ratings, please refer to Moody's Credit rating Methodology published in May 2016 entitled "Mapping National Scale Ratings from Global Scale Ratings". While NSRs have no inherent absolute meaning in terms of default risk or expected loss, a historical probability of default consistent with a given NSR can be inferred from the GSR to which it maps back at that particular point in time. For information on the historical default rates associated with different global scale rating categories over different investment horizons, please see https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1060333.
REGULATORY DISCLOSURES
Please click on this link http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_195681 for the List of Affected Credit Ratings. This list is an integral part of this Press Release and provides, for each of the credit ratings covered, Moody's disclosures on the following items:
• Releasing Office
• Person Approving the Credit Rating
For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The below contact information is provided for information purposes only. Please see the ratings tab of the issuer page at www.moodys.com, for each of the ratings covered, Moody's disclosures on the lead analyst and the Moody's legal entity that has issued the ratings.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.
The first name below is the lead rating analyst for this Credit Rating and the last name below is the person primarily responsible for approving this Credit Rating.