Hong Kong, November 07, 2022 -- Moody's Investors Service has affirmed the A1 long-term deposit rating of Agricultural Bank of China Limited (ABC). Moody's has also affirmed the bank's Baseline Credit Assessment (BCA) and Adjusted BCA of baa2.
The rating outlook remains stable, reflecting Moody's view that the willingness and capacity of the Government of China (A1 stable) to support ABC will remain unchanged over the next 12-18 months; and the bank's asset quality, capitalization and profitability will remain stable during this period.
A full list of affected ratings and assessments is at the end of this press release.
RATINGS RATIONALE
The affirmation of ABC's ratings with a stable outlook reflects the resilience of the bank's financial fundamentals amid a challenging operating environment in China. While the bank faces cyclical pressure on its asset quality, capitalization and profitability because of the impact from the slower economic growth, correction in the property market and disruptions from the lingering pandemic, Moody's expects these financial metrics to remain largely stable in the next 12-18 months on the back of its franchise in the county area of China and strong loan loss reserves.
ABC's baa2 BCA reflects the bank's extensive network and client base in the county area of China, as well as its stable asset quality, moderate capitalization and profitability, low reliance on market funds and adequate liquid resources.
ABC has been improving its asset quality metrics in recent years, with its nonperforming loans (NPLs) ratio decreasing to 1.40% as of the end of September 2022 from 1.43% as of the end of 2021 and 1.57% as of the end of 2020. New formation of NPLs remains a risk to ABC's asset quality. However, Moody's does not expect a significant deterioration in ABC's asset quality over the next 12-18 months because of its prudent client selection and effective risk-control measures. The bank's provision coverage ratio increased to 302.7% as of the end of September 2022 from 299.7% as of 31 December 2021. The bank's loans in county areas, which accounted for 37% of its gross loans, had a NPL ratio of 1.35% as of 30 June 2022, lower than the bank's average NPL ratio.
Moody's forecasts the bank's capital ratio, as measured by tangible common equity (TCE)/risk-weighted assets (RWA), will be stable at around 10% over the next 12-18 months. The bank's Core Tier 1 capital ratio declined to 11.12% as of the end of September 2022 from 11.44% as of the end of 2021 due to the dividend payout and accelerated asset growth. The bank's gross loans and total assets increased 12.8% and 16.4% during the first nine months of 2022, respectively.
The bank's profitability is challenged by the decline in net interest margin (NIM). ABC's net income/tangible assets ratio based on Moody's adjustments decreased to 0.77% in the first half of 2022 from 0.82% in the first half of 2021, mainly due to NIM contraction amid the declining interest rate environment in China. Credit cost is likely to stay elevated given the challenges to its asset quality, although the bank's buffer of loan loss reserves will mitigate volatility of profitability. In addition, the bank's rapid growth of loans in county areas, which have a higher loan yield than the bank's average, will also support its profitability.
Moody's expects ABC to maintain ample liquidity over the next 12-18 months, with sufficient liquid banking assets to cover its market funds. ABC's extensive network and strong client base in the county areas provide the bank a stable funding base. As of the end of September 2022, ABC had 74% of its assets funded through deposits, among which 59% were retail deposits. The bank's reliance on market funds remains low compared with peers, with its market funds/tangible banking assets ratio at 15.2% as of 30 June 2022, up from 13.6% as of 31 December 2021.
ABC's rating is based on China's Moderate+ Banking System Macro Profile. ABC's baa2 Adjusted BCA does not incorporate any affiliate support. China does not have an operational resolution regime. Therefore, Moody's applies its basic Loss Given Failure approach in rating ABC's debt securities.
Moody's assumes a very high probability of support from the Government of China in times of need, considering ABC's systemic importance, as indicated by its market share of the banking sector's total loans and deposits; the government's majority stake, including a 40.03% direct ownership in the bank through the sovereign wealth fund, Central Huijin Investment Ltd., and a 35.29% direct ownership in the bank through Ministry of Finance as of 30 September 2022; and the significant market impact and reputational damage to the government should the bank fail. As a result, ABC's deposit rating, counterparty risk rating and counterparty risk assessment are uplifted to A1, A1 and A1(cr) respectively.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
ABC's long-term deposit rating is already at the same level as Government of China's senior unsecured debt rating, after factoring in a very high probability of government support. Hence, there could be upward pressure on the rating should the capacity of the Government of China to support the bank, as reflected in its issuer rating, strengthen.
Moody's could raise ABC's BCA if China's credit conditions improve with sustainable economic recovery supported by a less intensive credit growth such that Moody's could raise the bank's Macro Profile. Moody's could also raise ABC's BCA if the bank (1) improves its capital position and profitability, with TCE/RWA ratio above 11% and net income/tangible assets above 1.0% on a sustained basis; (2) maintains stable asset quality and high NPL provision coverage, and (3) maintains strong liquidity and funding profiles.
Conversely, Moody's could downgrade the long-term deposit rating if the government's willingness or capability to support the bank weakens, or if the bank's BCA is lowered.
Moody's could lower ABC's BCA if the operating environment weakens significantly, for example, if China's economic growth moderates further or macro leverage rises, and thus exerting pressure on the bank's asset quality. Moody's could also lower ABC's BCA if the bank's profitability weakens significantly, with net income/tangible assets consistently below 0.5%; or its capitalization weakens, with TCE/RWA consistently below 9.5%.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Banks Methodology published in July 2021 and available at https://ratings.moodys.com/api/rmc-documents/71997. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.
Agricultural Bank of China Limited is a state-owned commercial bank, which accounted for 8.8% of the Chinese banking system's loans and 9.3% of deposits as of 30 June 2022. The bank is a global systemically important bank, as identified by the Financial Stability Board. Headquartered in Beijing, the bank reported total assets of RMB32.4 trillion and shareholders' equity of RMB2.5 trillion as of 30 June 2022.
LIST OF AFFECTED RATINGS/ASSESSMENTS
..Issuer: Agricultural Bank of China Limited
.... Adjusted Baseline Credit Assessment, Affirmed baa2
.... Baseline Credit Assessment, Affirmed baa2
....Long-term Counterparty Risk Assessment, Affirmed A1(cr)
....Short-term Counterparty Risk Assessment, Affirmed P-1(cr)
....Long-term Counterparty Risk Rating (Foreign and Local Currency), Affirmed A1
....Short-term Counterparty Risk Rating (Foreign and Local Currency), Affirmed P-1
....Long-term Deposit Rating (Foreign and Local Currency), Affirmed A1, outlook remains stable
....Short-term Deposit Rating (Foreign and Local Currency), Affirmed P-1
....Senior Unsecured Medium-Term Note Program (Foreign Currency), Affirmed (P)A1/(P)P-1
....Outlook, Remains Stable
..Issuer: Agricultural Bank of China Limited, Macao Br.
....Long-term Counterparty Risk Assessment, Affirmed A1(cr)
....Short-term Counterparty Risk Assessment, Affirmed P-1(cr)
....Long-term Counterparty Risk Rating (Foreign and Local Currency), Affirmed A1
....Short-term Counterparty Risk Rating (Foreign and Local Currency), Affirmed P-1
....Long-term/Short-term Senior Unsecured Deposit Note/CD Program (Foreign and Local Currency), Affirmed (P)A1/(P)P-1
....Long-term Senior Unsecured Deposit Note/CD Program Takedown (Foreign Currency), Affirmed A1, stable
....Senior Unsecured Medium-Term Note Program (Foreign and Local Currency), Affirmed (P)A1/(P)P-1
....Senior Unsecured Regular Bond/Debenture (Foreign and Local Currency), Affirmed A1, stable
....Outlook, Remains Stable
..Issuer: Agricultural Bank of China Limited, NY Branch
....Long-term Counterparty Risk Assessment, Affirmed A1(cr)
....Short-term Counterparty Risk Assessment, Affirmed P-1(cr)
....Long-term Counterparty Risk Rating (Foreign and Local Currency), Affirmed A1
....Short-term Counterparty Risk Rating (Foreign and Local Currency), Affirmed P-1
....Commercial Paper (Local Currency), Affirmed P-1
....Senior Unsecured Medium-Term Note Program (Foreign and Local Currency), Affirmed (P)A1/(P)P-1
....Senior Unsecured Regular Bond/Debenture (Local Currency), Affirmed A1, stable
....Outlook, Remains Stable
..Issuer: Agricultural Bank of China Ltd London Branch
....Long-term Counterparty Risk Assessment, Affirmed A1(cr)
....Short-term Counterparty Risk Assessment, Affirmed P-1(cr)
....Long-term Counterparty Risk Rating (Foreign and Local Currency), Affirmed A1
....Short-term Counterparty Risk Rating (Foreign and Local Currency), Affirmed P-1
....Senior Unsecured Medium-Term Note Program (Foreign and Local Currency), Affirmed (P)A1/(P)P-1
....Senior Unsecured Regular Bond/Debenture (Foreign Currency), Affirmed A1, stable
....Outlook, Remains Stable
..Issuer: Agricultural Bank of China Ltd, Dubai Branch
....Long-term Counterparty Risk Assessment, Affirmed A1(cr)
....Short-term Counterparty Risk Assessment, Affirmed P-1(cr)
....Long-term Counterparty Risk Rating (Foreign and Local Currency), Affirmed A1
....Short-term Counterparty Risk Rating (Foreign and Local Currency), Affirmed P-1
....Senior Unsecured Medium-Term Note Program (Foreign Currency), Affirmed (P)A1/(P)P-1
....Outlook, Remains Stable
..Issuer: Agricultural Bank of China Ltd, Singapore Br.
....Long-term Counterparty Risk Assessment, Affirmed A1(cr)
....Short-term Counterparty Risk Assessment, Affirmed P-1(cr)
....Long-term Counterparty Risk Rating (Foreign and Local Currency), Affirmed A1
....Short-term Counterparty Risk Rating (Foreign and Local Currency), Affirmed P-1
....Senior Unsecured Medium-Term Note Program (Foreign and Local Currency), Affirmed (P)A1/(P)P-1
....Senior Unsecured Regular Bond/Debenture (Foreign Currency), Affirmed A1, stable
....Outlook, Remains Stable
..Issuer: Agricultural Bank of China Ltd., HK Branch
....Long-term Counterparty Risk Assessment, Affirmed A1(cr)
....Short-term Counterparty Risk Assessment, Affirmed P-1(cr)
....Long-term Counterparty Risk Rating (Foreign and Local Currency), Affirmed A1
....Short-term Counterparty Risk Rating (Foreign and Local Currency), Affirmed P-1
....Senior Unsecured Medium-Term Note Program (Foreign Currency), Affirmed (P)A1/(P)P-1
....Senior Unsecured Regular Bond/Debenture (Foreign and Local Currency), Affirmed A1, stable
....Outlook, Remains Stable
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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 issuer/deal page for the respective issuer on https://ratings.moodys.com.
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The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on https://ratings.moodys.com.
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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.
David Jinhua Yin
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong,
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Chen Huang
Associate Managing Director
Financial Institutions Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong,
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
