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Rating Action:

Moody's affirms ABC's ratings; upgrades BFSR on IPO

09 Jul 2010

Hong Kong, July 09, 2010 -- Moody's Investors Service has today affirmed the A1/Prime-1 long- and short-term foreign currency deposit ratings of Agricultural Bank of China (ABC).

At the same time, Moody's has upgraded its standalone rating, or Bank Financial Strength Rating (BFSR) to D- from E+. The outlook on the BFSR is stable.

The A1/Prime-1 deposit ratings reflect this financial strength, coupled with expectations of very strong government support, if necessary. The outlook on these ratings is positive, reflecting in turn the positive outlook on China's sovereign rating.

The upgrade of ABC's standalone rating (BFSR) reflects three key points: 1) expectations of a strengthened capital position following the IPO; 2) expectations of more transparent disclosure and increased accountability as a result of being listed on the Shanghai and Hong Kong stock exchanges; and 3) a level of earnings and capital that will position the bank to manage potential rises in non-performing loans (NPLs), both in an expected and stress-case scenarios.

Underpinning these factors is Moody's expectation that ongoing strength in the Chinese economy will provide supportive conditions for profitability.

ABC's IPO is scheduled to launch in mid-July.

"During the past three years, ABC has shown improving financial metrics. In 2009, its NPLs declined both in absolute amounts and as a percentage of its loan book, and after the removal of RMB816 billion in NPLs from its balance sheet in 2008," says Yvonne Zhang, a Moody's Vice President and lead analyst for the bank.

"The key issue for ABC will be how asset quality evolves in the coming years. Its loan book grew by 33% in 2009, as it plays its part in China's strong economic stimulus packages," says Zhang. "In addition, ABC has not yet demonstrated the effectiveness of its developing corporate governance and risk management practices, and the adequacy of its steps to improve its internal controls and credit culture. Balancing risk and reward in rural lending will remain a challenging task for ABC."

As a result, Moody's ratings incorporate expectations that NPLs currently reported are at or near cyclical lows, and asset quality indicators will likely deteriorate. In particular, loans to local government financing vehicles, the real estate sector, and rural areas are likely to become a source of NPLs as these loans season.

"Nonetheless, in upgrading the BFSR, Moody's believes that ABC is positioned to manage the likely increase in NPLs without compromising materially its financial strength because of strengthened pre-provision profits, capital and loan-loss reserves, which provide cushions against both our base case and stressed case assumptions of expected rises in credit costs," adds Zhang.

Moreover, given its unparalleled vast branch network in the rural areas, ABC is uniquely positioned to benefit from China's urbanization process and the government's push to increase the income levels of the rural population. It will be credit positive if ABC is able to formulate and execute effective strategies to capitalize on this macro-trend

The outlook on the BFSR is stable, reflecting the solid positioning of the fundamental rating for the challenges likely ahead. The outlook on the A1 deposit rating is positive, reflecting the positive outlook on the sovereign.

Further positive rating pressure for either the BFSR or deposit rating is dependent on how the bank manages the conflicting demands of maintaining asset quality and growing its businesses in a sustainable manner, while also inevitably fulfilling a policy function, given the presence of majority government ownership.

In addition, an upgrade of the A1 deposit rating would require an upgrade in the sovereign rating, although this in itself would not automatically lead to an upgrade to the deposit rating.

Moody's last rating action on ABC was taken on November 9, 2009 when Moody's changed the outlook on its foreign currency deposit rating to positive from stable.

The principal methodology used in rating ABC was Moody's "Bank Financial Strength Ratings: Global Methodology", published in February 2007 and Moody's "Incorporation of Joint-Default Analysis into Moody's Bank Ratings: A Refined Methodology,", published in March 2007 are available on www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab.

Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Rating Methodologies sub-directory on Moody's website.

ABC is headquartered in Beijing. As of December 31, 2009, ABC reported total assets of RMB 8.9 trillion (approximately USD 1.3 trillion).

Below is a list of ABC's ratings:

Agricultural Bank of China:

Bank Financial Strength D- (upgraded from E+) with stable outlook

LT Bank Deposits (Foreign) A1 with positive outlook

ST Bank Deposits (Foreign) P-1

Beijing
Yi Zhang
Vice President - Senior Analyst
Financial Institutions Group
Moody's Beijing
Telephone:+86-10 6642 8968

Hong Kong
Stephen Long
MD - Financial Institutions
Financial Institutions Group
Moody's Asia Pacific Ltd.
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Moody's affirms ABC's ratings; upgrades BFSR on IPO
No Related Data.
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