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Rating Action:

Moody's affirms Industrial & Comm'l Bank of China (Macau)'s baa3 BCA and A2 deposit rating, upgrades its Adjusted BCA, and assigns A1/P-1 Counterparty Risk Rating; Outlook Stable

28 Jun 2018

Hong Kong, June 28, 2018 -- Moody's Investors Service has affirmed Industrial and Commercial Bank of China (Macau) Limited's (ICBC Macau) Baseline Credit Assessment (BCA) at baa3 and upgraded the bank's Adjusted BCA to baa1 from baa2. At the same time, Moody's has affirmed the bank's deposit ratings at A2/P-1, CD Program ratings at (P)A2/(P)P-1, and its Counterparty Risk Assessment (CRA) at A1(cr)/P-1(cr).

Moody's has also assigned A1/P-1 local and foreign currency Counterparty Risk Rating (CRR) to ICBC Macau.

Moody's Counterparty Risk Ratings are opinions of the ability of entities to honour the uncollateralized portion of non-debt counterparty financial liabilities (CRR liabilities) and also reflect the expected financial losses in the event such liabilities are not honoured. CRR liabilities typically relate to transactions with unrelated parties. Examples of CRR liabilities include the uncollateralized portion of payables arising from derivatives transactions and the uncollateralized portion of liabilities under sale and repurchase agreements. CRRs are not applicable to funding commitments or other obligations associated with covered bonds, letters of credit, guarantees, servicer and trustee obligations, and other similar obligations that arise from a bank performing its essential operating functions.

The outlook on the bank remains stable.

RATINGS RATIONALE

The affirmation of ICBC Macau's baa3 BCA takes into account its resilient asset quality metrics and relatively stable performance despite the volatility in Macau's economic growth and property market. The affirmation also reflects the bank's market position as the second largest bank in Macau by assets, as well as its sound capitalization, stable profitability and sound asset quality metrics. These strengths are offset by Moody's concerns over its fast balance sheet growth, high reliance on corporate deposits for funding, and the rundown in its liquid assets in 2017.

ICBC Macau's operations are primarily based in Macau, which has a small and relatively undiversified economy. There were material swings in Macau's economy during 2015 and 2016 due to weakness in the gaming and tourism sector. Nevertheless, the bank maintained good asset quality metrics and stable profitability despite the challenging operating environment. The bank's problem loan ratio remained consistently below 0.2% with credit costs remaining negligible. Meanwhile, the bank also reported stable profitability with return on average assets of around 1.1%.

ICBC Macau grew its loans by a very strong 21% in 2017. The loan growth was driven by increases in corporate lending, as the bank participated in a number of syndicated loans in Macau and Hong Kong. The bank's strong loan growth weakened its capitalization and liquidity profile. The bank's Tier 1 ratio fell to 11.3% at end-2017 from 12.4% at end-2016, while its Liquid Banking Assets / Tangible Banking Assets ratio fell to 23% from 33%. We do not expect the bank to maintain as rapid loan growth in 2018 as in 2017. That said, persistent strong balance sheet growth would likely weigh on the bank's capitalization, liquidity, and overall financial profile.

ICBC Macau has high reliance on a small number of depositors to fund its operations. The depositor concentration weigh negatively on its liquidity profile. Factors that mitigate our concerns over the bank's capitalization and liquidity profile include high likelihood of capital injection and liquidity support from the parent Industrial and Commercial Bank of China Limited (ICBC, deposits A1 stable, BCA baa1) to support the bank's growth. The Macau government is also among the top depositors at the bank, providing the bank with more stable funding source than corporate depositors.

Moody's incorporates very strong support from ICBC Macau's parent in the bank's ratings. The upgrade in the bank's Adjusted BCA to baa1 from baa2 takes into account the upgrade in the parent bank's BCA to baa1 from baa2 in late May, and parent's expected very strong willingness to support the bank. Moody's deposit rating also factors in indirect systemic support from the Chinese government flowing through its parent, resulting in the bank's A2 deposit ratings. The government support uplift stems from the parent's systemic importance in China, and ICBC's close business ties with its parent.

Counterparty Risk Ratings

The ICBC Macau's CRRs are in line with the bank's CRAs.

Because Moody's considers that Macau does not to have an operational resolution regime, in assigning CRRs to ICBC Macau, Moody's applies its basic Loss Given Failure (LGF) approach. Moody's basic LGF analysis positions CRRs in line with the bank's CRAs, one notch above the bank's adjusted BCA, prior to government support.

Furthermore, the CRRs also incorporate two notches of uplift due to Moody's assessment of expected indirect Chinese government support that is expected to flow through the bank's parent in times of need, based on the banks' strategic importance to the parent, and the parent's systemic importance in China. The uplifts are in line with those applied to the CRAs.

WHAT COULD MOVE THE RATINGS UP

The bank's deposit ratings and CRRs could be upgraded if China's sovereign rating or the parent bank's ratings are upgraded. The bank's BCA could be upgraded if it maintains adequate capitalization and low levels of non-performing loans, while demonstrates abilities to reduce large-borrower concentration risk and diversify its funding sources.

WHAT COULD MOVE THE RATINGS DOWN

ICBC Macau's deposit rating and CRRs could be downgraded if government support diminishes or if the parents' ratings are downgraded. The bank's BCA could be downgraded if operating conditions deteriorate, resulting in:

(1) weakened capitalization, with tangible common equity/risk weighted assets falling below 10%;

(2) materially worsened asset quality, with its NPL ratio exceeding 3%; and/or

(3) its loan-to-deposit ratio rising above 100%.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Banks published in June 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Industrial and Commercial Bank of China (Macau) Limited, headquartered in Macau, held total asset of MOP231 billion ($29 billion) at end-2017.

REGULATORY DISCLOSURES

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.

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.

Winnie Tang
Analyst
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

Minyan Liu
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

No Related Data.
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