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Rating Action:

Moody's affirms ratings of five securities firms in China and Hong Kong; changes outlook to stable

 The document has been translated in other languages

24 Feb 2017

Hong Kong, February 24, 2017 -- Moody's Investors Service has today affirmed the ratings of five securities firms in China (Aa3 negative) and Hong Kong (Aa1 negative), following the publication on 22 February of its new securities industry market makers rating methodology. This is now the primary methodology that Moody's uses to rate securities industry market makers globally except in jurisdictions where certain regulatory requirements must be fulfilled prior to the new methodology's implementation.

At the same time, Moody's has changed the outlooks on these securities firms to stable from negative.

The five firms include four domiciled in the mainland China and one in Hong Kong:

• CITIC Securities Company Limited (CITIC Securities), China

• Everbright Securities Company Limited (Everbright Securities), China

• Guotai Junan Securities Co., Ltd. (GTJA Securities), China

• China International Capital Corporation Ltd. (CICC), China

• Guotai Junan International Holdings Limited (GTJA International), Hong Kong

Moody's has also affirmed the Baa1 long-term senior unsecured debt rating and the (P)Baa1 long-term senior unsecured medium term note (MTN) program rating assigned to CITIC Securities Finance MTN Co., Ltd. Both instruments are guaranteed by CITIC Securities.

The full list of affected ratings is provided at the end of this press release.

RATINGS RATIONALE

Moody's rating actions on the five securities firms follow the publication of Moody's new securities industry market makers rating methodology, which incorporates a number of significant changes and enhancements from Moody's previous rating methodology for securities firms. Moody's has also published a separate new rating methodology for securities industry service providers.

These changes and enhancements for rating market makers include the introduction of new financial ratios such as a balance sheet leverage metric and stressed liquidity and funding ratios; the dynamic weighting of operating environment conditions that can adversely influence firms' creditworthiness; the incorporation of specific qualitative factors as direct notching adjustments to ratings; and the incorporation of Moody's joint default analysis (JDA) framework to consider affiliate and government support, if any.

Reflecting the new securities industry market makers methodology, Moody's rating actions on the five securities firms generally reflect the following considerations:

(1) The standalone assessments of these firms, which range from ba2 to ba1, reflect their adequate liquidity profiles, improved funding structures, declining but still lucrative profitability, high earnings volatility and low balance sheet leverage compared with global peers.

(2) The operating environment for Chinese securities industry market makers is constrained by intensifying competition and the country's still-developing capital markets. The operating environment for securities industry market makers in Hong Kong benefits from a relatively mature capital market, which helps offset challenging competitive dynamics.

(3) The very high likelihood of government support, a key input into the JDA framework incorporated in the new securities industry market makers rating methodology, for CITIC Securities, GTJA Securities and CICC, and the high likelihood of government support for Everbright Securities and GTJA International, consider their ownership structures, importance to the development of China's capital markets and the positioning of their international businesses.

The stable outlooks suggest that these firms do not face immediate pressure on their standalone assessments. Government support for these firms is also unlikely to change over the medium term. Their ratings are resilient to a hypothetical downside scenario in which the sovereign rating is downgraded by one notch, in view of the current negative outlook on the sovereign rating.

FIRM-SPECIFIC CONSIDERATIONS

CITIC Securities

The affirmation of the Baa1/P-2 issuer ratings with a stable outlook reflects Moody's view that the firm has benefitted from its improved standalone credit profile after the management investigation in the second half of 2015. Its improving standalone credit profile has also reduced its reliance on affiliate support from CITIC Group Corporation (A3 negative).

CITIC Securities' Baa1 long-term issuer rating reflects its standalone assessment of ba1 and a three-notch uplift based on Moody's assumption of a very high level of support from the Chinese government in times of stress.

Moody's has raised CITIC Securities' standalone assessment to ba1 from ba2, considering the limited impact of the management investigation on the firm's credit profile.

In August 2015, several members of the firm's senior management and employees of the company were requested by Chinese police to assist in an investigation. The firm elected and appointed a new chairman and chief executive officer in the first half of 2016.

The management investigation and changes did not adversely affect the firm's franchise and business. CITIC Securities remains the largest securities firm in China with a leading position in various business segments.

Moreover, the firm maintains sound liquidity and financial positions. It has continued to deleverage its balance sheet, with its leverage -- as measured by total assets/equity attributable to holders of ordinary shares - dropping to 3.8x at end-September 2016 from 5.9x at end-June 2015. The firm has also strengthened its risk management and internal controls by enlarging its risk management and compliance departments and providing more training to its staff.

Moody's believe that the improved standalone credit profile can help the firm reduce its reliance on affiliate support from CITIC Group. On the other hand, given CITIC Securities' position as China's largest securities firm by total assets and its status as an affiliate of the CITIC Group, Moody's assumes a very high probability of support for CITIC Securities from the Chinese government in case of need.

Everbright Securities

The affirmation of the Baa3/P-3 issuer ratings with a stable outlook reflects Moody's view that the firm has benefitted from its improved standalone credit profile after a significant trading error in August 2013. This improvement in its standalone credit profile has reduced its reliance on affiliate support from China Everbright Group Limited (unrated).

Everbright Securities' Baa3 long-term issuer rating reflects its standalone assessment of ba2 and a two-notch uplift based on Moody's assumption of a high level of support from the Chinese government in times of stress.

Moody's has raised Everbright Securities' standalone assessment to ba2 from b1, mainly to reflect the firm's continued improvement in its standalone credit profile during the past few years.

The firm has improved its liquidity management by increasing its long-term funding sources, including long-term debt and equity, to support its business growth in the past few years. Both its liquidity and funding ratios have sequentially improved as a result. The firm raised RMB7.4 billion in net new capital through its initial public offering in Hong Kong in August 2016, which further lowered its leverage -- as measured by total assets/equity attributable to holders of ordinary shares - to 3.6x at end-September 2016 from 4.6x at end-2015.

After the trading error in 2013, the firm has improved its risk management. In the past few years, the firm has not suffered any regulatory penalties or sanctions. The upgrade to a regulatory score of AA in July 2016 by the China Securities Regulatory Commission has enhanced its reputation and helped its business development and funding. However, it will take time for the company to prove that its risk management and governance standards have improved to the extent that they can mitigate and control the increasing risks that it faces. Moreover, the firm's rapid asset growth will increase its market, credit and operational risks.

Moody's believes that its improved standalone credit profile can help the firm reduce its reliance on affiliate support from China Everbright Group. At the same time, given Everbright Securities' position as a medium-sized securities firm in China by total assets, and its 49.6% direct and indirect ownership by China Everbright Group as of end-September 2016, a key state-owned financial conglomerate, Moody's believes that there is a high probability that the Chinese government would support Everbright Securities in times of need to maintain stability in China's financial system.

GTJA Securities

GTJA Securities' Baa1 long-term issuer rating reflects its standalone assessment of ba1 and a three-notch uplift based on Moody's assumption of a very high level of support from the Chinese government in times of stress.

GTJA Securities has established a strong retail brokerage franchise through an extensive branch network. It is also one of the leading players in the investment banking and asset management business in China.

The firm has been shrinking its balance sheet since the second half of 2015. Its leverage -- as measured by total assets/equity attributable to holders of ordinary shares - decreased to 4.6x at end-2016 from 5.3x at end-2015.

The firm has materially increased its long-term funding following its A-share listing in June 2015, and has since maintained adequate liquidity on its balance sheet.

The firm's profitability metrics in 2016 declined on a year-on-year basis due to volatile market conditions and intensified competition, but remained relatively high. Its return on average assets (excluding one-off gains) stood at 2.3% in 2016.

Moody's views GTJA Securities as a flagship securities firm owned by the Shanghai government as part of its aim to develop Shanghai into an international financial center. In addition, given GTJA Securities' position as one of the largest securities firms in China by total assets, Moody's believes that there is a very high probability that the Chinese government would support the firm in times of need.

CICC

CICC's Baa1 long-term issuer rating reflects its standalone assessment of ba1 and a three-notch uplift based on Moody's assumption of a very high level of support from the Chinese government in times of stress.

As the first joint-venture investment bank in China, CICC has evolved into a flagship investment bank that takes a leading role in mega state-owned enterprise (SOE) related transactions and cross-border deals.

In recent years, CICC has expanded rapidly its total assets and securities investments. CICC's leverage -- as measured by total assets/equity attributable to holders of ordinary shares -- rose to 6.7x at end-June 2016 from 6.1x at end-2015. Among its securities investments, a substantial proportion of equity securities are from total return swaps that are fully or partially funded by clients. In consequence, the firm has been able to maintain good liquidity and funding profiles despite its rapid asset growth.

On 4 November 2016, the firm announced that it had agreed to acquire China Investment Securities Company Limited (CISC, unrated). The proposed acquisition, if completed, could materially expand CICC's branch network and retail client base in China, and could improve its funding, liquidity and profitability metrics on a consolidated basis.

Moody's assumption of a very high level of government support, if needed, is based on CICC's longstanding linkage with the Chinese government. Its largest shareholder is Central Huijin Investment Ltd. (unrated), a core investment arm of the government. Moreover, while CICC's role has evolved over time, Moody's believes its strong investment banking expertise remains relevant to China's SOE reform agenda.

GTJA International

GTJA International' Baa2 long-term issuer rating reflects its standalone assessment of ba1 and a two-notch uplift based on Moody's assumption of a high level of support from the Chinese government in times of stress.

Moody's has raised GTJA International's standalone assessment to ba1 from ba2, reflecting its sound financial metrics under the new methodology. At the same time, Moody's has reduced the uplift for government support to two notches from three notches, considering China's tightening capital account controls.

GTJA International takes a leading position in the niche market of helping mainland individuals trade offshore securities. It has established a large high-net-worth client base in the past 20 years.

The majority of GTJA International's revenues are related to the trading activities of its retail clients. Its brokerage and margin loan businesses, which carry low asset impairment risk, contributed 16% and 44%, respectively, of total revenue in 2016.

GTJA International's total assets increased at a compound annual growth rate of 40.7% during 2012-2016, driven by its margin loans and structured products. The firm's leverage - as measured by total assets/equity attributable to holders of ordinary shares - rose to 5.5x at end-2016 from 3.4x at end-2012.

However, this rising leverage is partially mitigated by the consideration that GTJA International's structured products are fully funded by clients and counterparty financial institutions.

GTJA International has maintained good profitability metrics in recent years. However, its return on average assets declined to 2.5% in 2016 due to the rapid expansion of assets associated with structured products.

Moody's sees a high level of support from its parent company and the Shanghai government through its parent, as GTJA International is the sole international business operation of GTJA Securities. The failure of GTJA International would raise material reputational risk for both its parent company and the Shanghai government, and significantly hurt the internationalization strategy of GTJA Securities. However, China's tightening capital account controls could negatively impact the timeliness of such support.

Factors that could lead to an Upgrade -- CITIC Securities, GTJA Securities and CICC

The ratings could be upgraded if the respective firm (1) continues to improve its funding and liquidity ratios; (2) maintains good profitability despite intensifying competition and market fluctuations; and (3) lowers its pre-tax earnings volatility.

The ratings could also be upgraded if China's capital markets continue to deepen without episodes of high volatility and industry consolidation improves the pricing power of leading players.

Factors that could lead to a Downgrade -- CITIC Securities, GTJA Securities and CICC

The ratings could be downgraded if Moody's assesses that the government's willingness and ability to support the firm weaken.

The ratings could also be downgraded if the respective firm (1) encounters a material deterioration in profitability; (2) experiences a material weakening in its financial position, for example due to a substantial increase in leverage and/or deterioration of its liquidity position; and/or (3) becomes subject to regulatory sanctions that impair its franchise and management stability.

Factors that could lead to an Upgrade -- Everbright Securities

Everbright Securities' ratings could be upgraded if the firm: (1) maintains its existing financial positions without any significant regulatory issues in the next 1-2 years; (2) slows its asset growth to a level in line with the sector average; and (3) lowers its pre-tax earnings volatility.

Everbright Securities' ratings could also be upgraded if China's capital markets continue to deepen without episodes of high volatility and industry consolidation improves the pricing power of leading players.

Factors that could lead to a Downgrade -- Everbright Securities

Everbright Securities' ratings could be downgraded if Moody's assesses that the government's willingness and ability to support the firm weaken.

Everbright Securities' ratings could also be downgraded if the firm (1) encounters a material deterioration in its profitability; (2) experiences a material weakening in its financial position, for example due to a substantial increase in leverage and/or deterioration of its liquidity position; and/or (3) becomes subject to regulatory sanctions that impair its franchise and management stability.

Factors that could lead to an Upgrade -- GTJA International

GTJA International's ratings could be upgraded if its parent company's rating is upgraded.

In addition, GTJA International's ratings could be upgraded if the firm (1) continues to improve its funding and liquidity ratios; (2) maintains good profitability despite intensifying competition and market fluctuations; and (3) slows its asset growth.

Factors that could lead to a Downgrade -- GTJA International

GTJA International's ratings could be downgraded if Moody's assesses that the willingness and ability of its parent company or the Chinese government to support the firm weaken.

GTJA International's ratings could also be downgraded if the firm (1) encounters a material deterioration in its profitability; (2) experiences a material weakening in its financial position, for example due to a substantial increase in leverage and/or deterioration of its liquidity position; (3) becomes subject to regulatory sanctions that impair its franchise and management stability; and/or (4) experiences significant risk management failures.

The principal methodology used in these ratings was Securities Industry Market Makers published in February 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

LIST OF AFFECTED RATINGS:

CITIC Securities Company Limited (Lead Analyst: Sean Hung)

• Long-term and short term (foreign currency) issuer ratings affirmed at Baa1/P-2, outlook changed to stable from negative on long-term issuer rating

• Outlook changed to stable from negative

CITIC Securities Finance MTN Co., Ltd. (Lead Analyst: Sean Hung)

• BACKED senior unsecured local currency debt rating affirmed at Baa1, outlook changed to stable from negative on the rating

• BACKED Senior Unsecured local currency MTN program rating affirmed at (P)Baa1

• Outlook changed to stable from negative

Everbright Securities Company Limited (Lead Analyst: Sean Hung)

• Long-term and short term (local/foreign currency) issuer ratings affirmed at Baa3/P-3, outlook changed to stable from negative on long-term issuer ratings

• Outlook changed to stable from negative

Guotai Junan Securities Co., Ltd. (Lead Analyst: David Yin)

• Long-term and short term (local/foreign currency) issuer ratings affirmed at Baa1/P-2, outlook changed to stable from negative on long-term issuer ratings

• Outlook changed to stable from negative

China International Capital Corporation Ltd. (Lead Analyst: David Yin)

• Long-term and short term (local/foreign currency) issuer ratings affirmed at Baa1/P-2, outlook changed to stable from negative on long-term issuer ratings

• Outlook changed to stable from negative

Guotai Junan International Holdings Limited (Lead Analyst: David Yin)

• Long-term and short term (local/foreign currency) issuer ratings affirmed at Baa2/P-2, outlook changed to stable from negative on long-term issuer ratings

• Outlook changed to stable from negative

RELATED RESEARCH REFERENCES

For further details please refer to the following:

» Press release: Moody's publishes its updated methodologies for rating securities firms

https://www.moodys.com/research/--PR_362296

» Rating Methodology: Securities Industry Market Makers

https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1038412

» Rating Methodology: Securities Industry Service Providers

https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1042321

» Securities & Exchanges page on moodys.com

http://www.moodys.com/securitiesandexchanges

Please see the credit opinions of specific issuers on www.moodys.com for the more detailed implications of Issuer rating actions.

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.

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.

David Yin
Asst Vice President - 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

Minyan Liu
Associate Managing Director
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

No Related Data.
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