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Rating Action:

Moody's assigns first-time Ba2/NP ratings to Bank of Suzhou

 The document has been translated in other languages

23 Sep 2016

Hong Kong, September 23, 2016 -- Moody's Investors Service has assigned Ba2 long-term and NP short-term local currency and foreign currency issuer and deposit ratings, a ba3 baseline credit assessment (BCA) and Adjusted BCA, as well as a Ba1(cr)/NP(cr) Counterparty Risk Assessment (CR Assessment) to Bank of Suzhou Co., Ltd. (Bank of Suzhou).

This is the first time that Moody's has assigned ratings to Bank of Suzhou.

Bank of Suzhou's Ba2 long-term issuer ratings and deposit ratings reflect the bank's BCA of ba3 and a one-notch uplift based on Moody's assumption of a moderate level of government support.

The ratings outlook is stable, as the one-notch uplift included in the ratings is not affected by the negative outlook on China's Aa3 sovereign rating.

RATINGS RATIONALE

Bank of Suzhou's BCA of ba3 reflects its increasing level of asset quality pressure, relatively weak profitability, and decreasing capital ratio. The BCA also considers its growing deposit base and adequate liquid resources.

Bank of Suzhou officially opened in September 2010 through the transformation of the previous Jiangsu Dongwu Rural Commercial Bank Co., Ltd. (unrated).

The bank reported a non-performing loan (NPL) ratio of 1.48% and special-mention loan (SML) ratio of 3.72% at end-2015, up from 1.37% and 1.06% respectively at end-2014.

Moody's believes that its asset quality will continue to weaken as a result of: 1) its focus on lending to SMEs in Jiangsu Province, and these businesses are highly sensitive to China's economic slowdown; 2) its relatively high concentration on lending to the high risk manufacturing sector when compared with Moody's rated peers; and 3) its rapid asset growth in the past few years, which has exposed the bank to unseasoned risk.

Even though Bank of Suzhou's 2.79% net interest margin in 2015 was high for Moody's rated peers, the bank's overall profitability was still weak compared with those peers, impacted negatively by its low contribution of fee and commission income and increasing credit costs.

Despite increasing non-interest income, the percentage of its fee income to total income was only 10.7% in 2015. Impairment charges increased 85% year-over-year in 2015 against the backdrop of moderating Chinese economic growth.

Bank of Suzhou reported a Common Equity Tier 1 ratio of 10.67% at end-2015, down from 11.68% in 2014 and 14.05% in 2013. Although asset growth slowed in 2015, its capital base will be challenged on an ongoing basis by its relatively low internal capital generation capability.

On the other hand, its funding structure is stable with strong deposit growth..

Originating as a rural commercial bank, it has an established network in the township areas. Its franchise in the city is also improving as it is the only city commercial bank incorporated in Suzhou.

Its deposit base exhibited a Compound Annualized Growth Rate of 23% from 2012 to 2015, both as a result of its expansion in other areas of Jiangsu Province and its improving market shares in Suzhou.

Bank of Suzhou's liquid resources were also adequate to cover its market funds at end 2015.

Moody's believes Bank of Suzhou will receive a moderate level of government support in times of need, given its status as the only city commercial bank incorporated in Suzhou and the role that it plays in the development of Suzhou, a city with a GDP of RMB1.45 trillion in 2015 and a population of 10.6 million. Furthermore, the total shareholding held by Suzhou state-owned entities accounted for 27.1% of the bank's shares at end-June 2016, including 10.0% held by Suzhou International Development Group Co., Ltd. (unrated), a state-owned financial holding company established in Suzhou.

However, its franchise is still limited at this moment on a national level, despite a deposit market share of 4-5% in Suzhou at end-2015, barring it from a higher level of government support.

WHAT COULD CHANGE THE RATING - UP

Bank of Suzhou's deposit ratings incorporate a moderate level of government support and is unlikely to rise further, particularly in view of the negative outlook on the Chinese sovereign rating.

Its BCA is unlikely to rise as well due to the weakening operating environment. However, its BCA could experience upward pressure if (1) its operating environment, as measured by China banking industry's Macro Profile, improves; (2) its asset quality, as measured by new problem loan formation, and profitability, as measured by return on average assets, remain resilient despite slower economic growth; and (3) its capital strengthens, such that its Common Equity Tier 1 capital ratio improves.

WHAT COULD CHANGE THE RATING - DOWN

Bank of Suzhou's BCA could experience downward pressure if (1) its operating environment weakens materially, i.e. if China's economic growth continues to slow, or corporate financial leverage continues to rise; (2) its asset quality and profitability weaken materially; or (3) its capital weakens.

In addition, given the one-notch uplift incorporated in the bank's deposit ratings, any indication of reduced support from the government would be negative.

CR ASSESSMENT

Bank of Suzhou's CR Assessment is positioned, prior to government support, at one notch above the Adjusted BCA, reflecting Moody's view that its probability of default is lower than those of senior unsecured debt and deposits in the absence of government support.

The CR Assessments also benefit from one-notch of government support, broadly in line with Moody's support assumptions on deposits. This reflects Moody's view that any support provided by governmental authorities to a bank, which benefits deposits, is very likely to benefit operating activities and obligations reflected by the CR Assessment as well, consistent with Moody's belief that governments are likely to maintain such operations as a going-concern in order to reduce contagion and preserve a bank's critical functions.

The principal methodology used in these ratings was Banks published in January 2016. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.

Bank of Suzhou Co., Ltd. is headquartered in Suzhou, Jiangsu Province. It reported assets totaling RMB231 billion (approximately USD35.6 billion) at end-2015.

The Local Market analyst for this rating is Yulia Wan +86.21.2057.4017

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.

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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