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Rating Action:

Moody's assigns first-time Baa2/P-2 ratings to China Banking Corporation

31 May 2017

Singapore, May 31, 2017 -- Moody's Investors Service has assigned the following first-time credit ratings and assessments to China Banking Corporation (China Bank):

- Baa2 long-term local and foreign currency deposit ratings; stable outlook

- Baa2 long-term local and foreign currency issuer ratings; stable outlook

- P-2 short-term local and foreign currency deposit ratings

- P-2 short-term local and foreign currency issuer ratings

- baa3 baseline credit assessment (BCA) and Adjusted BCA

The long-term and short-term Counterparty Risk Assessments (CR Assessments) assigned to China Bank are Baa2(cr)/P-2(cr).

The rating outlook is stable

RATINGS RATIONALE

China Bank's Baa2 rating incorporates: (1) its baseline credit assessment (BCA) of baa3; and (2) a one-notch rating uplift, due to our assessment that the bank will receive support from the Government of the Philippines (Baa2 stable) in times of need. The outlook on the long-term ratings is stable, in line with the stable outlook on the Philippines' sovereign rating.

China Bank's BCA of baa3 is underpinned by its long-standing relationships with Chinese-Filipino businesses, strong capitalization boosted by a PHP15 billion (approximately $300 million) rights issuance completed in May 2017, stable asset quality backed by a robust macroeconomic environment, and strong support from key shareholders, in particular Henry Sy affiliated SM Investments Corporation (SMIC, unrated) and Sysmart Corporation (Sysmart, unrated). Moody's expects the bank to receive strong shareholder support from its key shareholders in the form of capital and on the funding and liquidity front.

These strengths are balanced by the banks' above industry loan growth and high single borrower concentration that could pose downside risks to its asset quality. Furthermore, the bank's funding profile is modest compared to other rated-peers, with a high reliance on high-cost corporate deposits.

Over the next 12-18 months, Moody's expects broad stability in the bank's asset quality given the robust operating environment and the relatively low level of leverage in the economy. The bank's reported non-performing loans ratio improved to 1.9% at end-2016 from 2.5% at end-2015 due to a faster pace of loan growth.

At the same time, its above industry average growth -- compound annual growth of 19% between 2006-2016 against the system's 16% -- exposes the bank to unseasoned risk. China Bank's high borrower concentration also represents a latent risk to its asset quality, although its exposures are diversified to multiple operating entities within the Philippine conglomerate groups -- a common feature among the rated Philippine banks.

Moody's expects the rights issuance in May will add about 300 basis points to the banks' capitalization level and on a pro-forma basis will bring its common equity tier 1 (CET1) ratio to about 14.2% from 11.3% reported at end-December 2016, comfortably above the minimum requirement of about 10% (assuming a 1.5% D-SIB buffer). In addition, based on Moody's estimates, even after assuming 20%-25% loan growth annually over the next 2-3 years, the bank's capitalization profile will remain above the minimum Basel III requirements.

China Bank's funding profile is somewhat weaker than that of its peers, with depositor concentration increasing significantly over 2016 to fund its somewhat rapid loan growth of 24% over the same period. Nevertheless, Moody's expects stability in the banks' funding profile. In addition, liquid assets -- which represent 31% of the banks' tangible assets at the end of 2016 -- provide some support against downside risks.

The banks' rating also takes into account our basic loss-given failure analysis, where creditors are not presumed to absorb losses outside of bank liquidation, since no operational resolution regime is in place in the Philippines.

WHAT COULD CHANGE THE RATING -- UP

An upward revision of China Banks' BCA would likely lead to an upgrade of its ratings, assuming that its credit metrics remain robust.

The BCA could be revised upwards if:

(1) the bank maintains low levels of nonperforming assets -- namely NPLs and foreclosed assets -- while keeping credit costs low;

(2) it reduces its concentration risk to large borrowers; and

(3) it diversifies its funding sources and reduces its dependence on high cost corporate deposits.

WHAT COULD CHANGE THE RATING -- DOWN

The bank's BCA and consequently its ratings could be lowered if:

(1) aggressive organic expansion or acquisitions result in a significant increase in its risk profile;

(2) its operating environment weakens significantly or underwriting practices become lax, resulting in a significant increase in nonperforming assets (NPLs and foreclosed assets);

(3) there is a material increase in concentration risk to large borrowers;

(4) its reliance on corporate deposits creates significant refinancing risks or liquidity issues; and/or

(5) the Macro Profile for the Philippines is lowered; the Macro Profile is a rating input used to determine a bank's BCA, and is designed to capture system-wide factors that are predictive of the propensity of banks to fail.

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

Established in 1920, China Bank is one of the oldest banks' in the Philippines with a long-standing niche in financing Chinese-Filipino corporates and SME business owners. China Bank is headquartered in Manila, and reported assets of PHP620.4 billion (approximately $12.4 billion) at end-March 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.

Alka Anbarasu
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Gene Fang
Associate Managing Director
Financial Institutions Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

No Related Data.
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