Hong Kong, November 07, 2012 -- Moody's Investors Service has affirmed the long-term/short-term
deposit ratings of A1/P-1 for China's big four banks:
• Industrial and Commercial Bank of China (ICBC)
• China Construction Bank (CCB)
• Bank of China (BOC)
• Agricultural Bank of China (ABC)
Moody's has also affirmed:
• ICBC's D+ bank financial strength rating (BFSR),
which translates into a ba1 baseline credit assessment (BCA) on Moody's
long-term scale
• CCB's D+ BFSR/ba1 BCA
• BOC's D BFSR/ba2 BCA and A1 senior unsecured debt rating
At the same time, Moody's has upgraded ABC's BFSR/BCA
to D/ba2 from D-/ba3.
The outlook for all ratings is stable.
RATINGS RATIONALE
Affirmation of ratings of ICBC, CCB and BOC with a stable outlook
"The affirmation of the ratings of ICBC, CCB and BOC with
a stable outlook follows a review of the latest economic and regulatory
developments in China. It reflects our assessment that these banks'
performances, especially in terms of asset quality and profitability,
will prove resilient in the current challenging operating environment,"
says Bin Hu, a Moody's Vice President and Senior Analyst.
"At the same time, the three have recorded increases in delinquent
and special-mention loans since late 2011 as a result of China's
economic slowdown," says Hu.
"They also face margin pressure as parts of their loan books have
yet to be re-priced at lower rates, following moves by the
People's Bank of China, the central bank, in June and
July to cut interest rates and widen the floating ranges for the rates
against which Chinese banks benchmark their lending and deposit rates,"
says Hu.
"Nonetheless, we do not expect a sharp fall in these banks'
asset quality and profitability over the next 12-18 months as China's
overall economy, although slowing, is still growing at above
the government's target; the banks have taken measures to restructure
and monitor loans to local government financial vehicles; and the
authorities are implementing only gradually regulatory changes that could
negatively affect bank earnings," says Hu.
Some sectors -- such as retail and wholesale trade,
shipping, steel, solar energy, manufacturing and those
related to exports -- have also been negatively affected
by the economic slowdown, while the real estate sector has been
impacted by government measures to control prices.
But these three banks -- ICBC, CCB and BOC --
have large loan portfolios and strong franchises, which allow them
to both diversify risk across sectors and geographies, and to approach
credit underwriting on a more selective basis when compared to their smaller
peers.
As noted, despite the slowdown and weak external demand, the
economy is still expanding at a significant pace, growing 7.7%
on an annualized basis in Jan-Sep 2012 and in the absence of significant
government fiscal stimulus. The decision by Chinese policymakers
not to embark on another bout of government-promoted lending --
similar to what was seen in 2009 -- is also likely to help the banks
avoid the excessive risk-taking often related to rapid credit growth.
On loans to local government financial vehicles, Moody's recognizes
that moves by the banks to extend tenors will not eliminate risk,
but the resulting projected cash flows would better match loan repayment
schedules and thus reduce potential loan delinquencies.
Another challenge for these banks is ongoing initiatives by the regulators
to deregulate the financial markets, including, but not limited
to, the further widening of bands for lending and deposit rates
and allowing more companies to raise funds from the capital market.
This trend poses a long-term challenge to Chinese banks,
but would unlikely cause a significant reduction in their profits in the
next one to two years. Moody's research suggests that the
banks' net interest margin may decline by a modest 4-6 basis
points in 2012 and, on our base case assumptions, by 10-13
basis points in 2013.
While such results would represent a negative trend, the impact
on overall profitability will be modest during the next 12-18 months
and consistent with the banks' ratings and stable outlook.
The liberalization process for interest rates is also expected to be gradual.
Moreover, the major banks continue to command a degree of pricing
power on loans, particularly with regard to small- and medium-sized
borrowers due to their strong demand for credit.
Other rating considerations include their low level of reliance on wholesale
funds and their healthy capital adequacy levels. In addition,
Moody's assesses systemic support for these banks in times of stress
to be very high due to their high levels of government ownership and their
systemic importance to China's economy.
ICBC's Jan-Sep 2012 profit was up 13% year-on-year.
At end-September 2012, its non-performing loans (NPL)
ratio was 0.87% (seven basis points lower than end-2011),
reserve coverage ratio 288% and Tier 1 capital ratio 10.5%.
CCB's Jan-Sep 2012 profit was up 14% year-on-year.
At end-September 2012, its NPL ratio was 1.00%
(nine basis points lower than end-2011), reserve coverage
ratio 263% and Tier 1 capital ratio 11.4%.
BOC's Jan-Sep 2012 profit was up 10% year-on-year.
At end-September 2012, its NPL ratio was 0.93%
(seven basis points lower than end-2011), reserve coverage
ratio 237% and Tier 1 capital ratio 10.4%.
Affirmation of ABC's deposit rating and upgrade of its BCA with
a stable outlook
"The affirmation of ABC's deposit ratings considers the same
factors mentioned above for ICBC, CCB and BOC," says
Hu. "In addition, the upgrade of ABC's BCA reflects
the improvement in the bank's performance since its IPO in 2010 in Shanghai
and Hong Kong."
Its Tier 1 capital ratio, though still lower than the other three
big banks, strengthened significantly to 9.8% at end-September
2012 from 7.7% at end-2009.
Profitability has also been healthy, and its return on average assets
for Jan-Sep 2012 improved to 1.29% from 0.82%
in 2009.
Meanwhile, its NPLs have declined both in absolute amounts and as
a percentage of its loan book since 2009. At end-September
2012, its NPL ratio was at 1.34%, down from
2.91% at end-2009. ABC also reported a high
reserve coverage ratio of 311%.
Its status as a listed public company -- and the resultant added
public scrutiny -- have led to more transparency and disclosure,
and greater accountability.
When compared with its Chinese peers, ABC also exhibits better profitability
and stronger liquidity, mainly due to its traditional focus on rural
business. Urbanization continues to provide lending opportunities
at the county level. China is divided into provinces and autonomous
regions which are further divided into cities and then counties.
Moreover, a shift in development strategy by the Chinese government
towards western and central China will favor ABC more than the other banks.
Other considerations for its still modest BCA include the challenge of
balancing the returns in rural lending with the attendant risks.
Profitability will be negatively impacted not only by interest rate deregulation,
but also by the higher credit costs related to its lending activities,
if risk is not properly managed.
All the big four banks' BCAs are conservatively positioned relative
to their financial metrics due to our concerns over their unseasoned risk
and governance systems and credit portfolios, particularly in view
of the rapid loan growth evident in 2009. We would likely upgrade
their BCAs next year if there are growing signs of economic stabilization
and if these banks can keep their financial performances close to current
levels. However, upgrades to their current A1 deposit and
debt ratings are remote, given the high amount of systemic uplift
already present in these ratings.
On the other hand, the big four banks' BCAs could decline
if there is evidence that (i) the recent vintage of loan originations
will strain their financial strength more than Moody's has assumed,
(ii) their financial leverage rises significantly from current levels
due to aggressive business growth, or (iii) there is a reversal
in the trend towards improvements in risk management, controls and
corporate governance.
Since we have assumed substantial systemic support in the big four banks'
deposit ratings, any indication that government support is anything
other than extremely high would be negative for their deposit and debt
ratings, although this scenario is currently viewed as unlikely
in the medium term.
The principal methodology used in these ratings was Moody's Consolidated
Global Bank Rating Methodology published in June 2012. Please see
the Credit Policy page on www.moodys.com for a copy of this
methodology.
The big four Chinese banks are all headquartered in Beijing. As
of 30 September, 2012, ICBC's assets totaled RMB17.4
trillion, CCB's assets RMB13.3 trillion, ABC's
assets RM13.1 trillion and BOC's assets RMB12.7 trillion.
The four banks account for about 45% of system assets.
The local Market analyst for ICBC and BOC is Yi Zhang, +86
(10) 6319-6562.
REGULATORY DISCLOSURES
The Global Scale Credit Ratings on this press release that are issued
by one of Moody's affiliates outside the EU are endorsed by Moody's
Investors Service Ltd., One Canada Square, Canary Wharf,
London E 14 5FA, UK, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
Further information on the EU endorsement status and on the Moody's
office that has issued a particular Credit Rating is available on www.moodys.com.
For ratings issued on a program, series or category/class of debt,
this announcement provides relevant 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 relevant regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides relevant 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.
Moody's considers the quality of information available on the rated
entities, obligations or credits satisfactory for the purposes of
issuing these ratings.
Moody's adopts all necessary measures so that the information it
uses in assigning the ratings is of sufficient quality and from sources
Moody's considers to be reliable including, when appropriate,
independent third-party sources. However, Moody's
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
Please see Moody's Rating Symbols and Definitions on the Rating
Process page on www.moodys.com for further information on
the meaning of each rating category and the definition of default and
recovery.
Please see ratings tab on the issuer/entity page on www.moodys.com
for the last rating action and the rating history. The date on
which some ratings were first released goes back to a time before Moody's
ratings were fully digitized and accurate data may not be available.
Consequently, Moody's provides a date that it believes is
the most reliable and accurate based on the information that is available
to it. Please see the ratings disclosure page on our website www.moodys.com
for further information.
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.
Bin Hu
Vice President - Senior 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
SUBSCRIBERS: (852) 3551-3077
Stephen Long
MD - Financial Institutions
Financial Institutions Group
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (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
SUBSCRIBERS: (852) 3551-3077
Moody's affirms big four Chinese banks' deposit ratings
