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Rating Action:

Moody's assigns first-time Baa2/P-2 ratings to SWHY Securities; outlook stable

 The document has been translated in other languages

09 Jun 2020

Hong Kong, June 09, 2020 -- Moody's Investors Service has assigned a Baa2 long-term issuer rating and a Prime-2 short-term issuer rating to Shenwan Hongyuan Securities Co Ltd. (SWHY Securities).

The entity-level outlook on SWHY Securities is stable.

This is the first time that Moody's has assigned ratings to SWHY Securities.

RATINGS RATIONALE

SWHY Securities' Baa2 long-term issuer rating incorporates (1) its standalone assessment of Ba1; and (2) a two-notch uplift, based on Moody's assumption of a high level of support from the Chinese government (A1 stable), in times of need.

The Ba1 standalone assessment reflects SWHY Securities' (1) brokerage franchise in China's securities industry; (2) good liquidity and stable funding structure; (3) stable profitability; and (4) low leverage when compared with global peers.

Offsetting these credit strengths are the risks arising from the rapid increase in its fixed-income securities investments and the high credit risk stemming from its stock pledged lending business. SWHY Securities' standalone assessment also takes into account the challenging operating environment for securities companies in China.

SWHY Securities was formed by two mid-size Chinese securities companies, Shenyin Wanguo Securities and Hongyuan Securities, under Central Huijin Investment Ltd. in 2015. Hence, SWHY Securities inherited these two companies' strong brokerage franchise in both western and eastern parts of China.

The company has maintained a good liquidity position over the past few years. As of 31 December 2019, the company held RMB20.1 billion in cash and deposits, which accounted for 7% of its total assets, excluding segregated cash from brokerage clients. Moreover, it had large amounts of liquid assets including treasury bonds, policy bank bonds, money market funds and interbank certificates of deposit.

In addition, SWHY Securities has kept a very stable funding structure. Since 2016, its long-term funding — including shareholders' equity, long-term bonds and borrowings — has been above 50% of the company's total equity and liabilities, excluding segregated cash from clients -- a level that is higher than that of most other Chinese securities companies.

With its retail brokerage franchise, SWHY Securities' major revenues are from brokerage fees, interest income from securities lending and investment income. While its return on average assets (ROAAs) is slightly lower than large domestic Chinese securities peers with larger investment books, SWHY Securities has reported relatively stable profitability over the past few years. Its ROAAs were 1.3% and 1.7% in 2018 and 2019 respectively, under Moody's calculation.

While the company reported strong asset growth over the past few years, its leverage, as measured by total assets divided by equity attributable to holders of ordinary shares, reduced to 4.7x as of 31 December 2019 from 5.1x at the end of 2017, mainly because of strong profitability and continuous capital injection from its shareholders.

However, SWHY Securities strengthened its market making business and enlarged its securities investments in FICC over the past few years, which exposes the company to higher market and credit risks. Its financial investments, including financial assets at fair value through profit or loss, debt and equity instruments at fair value through other comprehensive income, and debt instruments at amortized cost, amounted to RMB160 billion as of 31 December 2019, accounting for 45% of total assets.

While SWHY Securities has deliberately curtailed the growth of its stock pledged lending business as it exposes the firm to credit and liquidity risk, its exposure is still higher than most other securities companies. At the end of 2019, the company's total pledged lending was RMB26.5 billion, which amounted to 7% of total assets.

SWHY Securities is wholly owned by Shenwan Hongyuan Group Co Ltd (SWHY Group) which is 26.3% owned by China Jianyin Investment Limited (JIC, A2 stable, BCA:baa2), 20.1% by Central Huijin Investment Ltd. (Central Huijin) and 4.8% by other Central Huijin's entities. Since JIC is wholly owned by Central Huijin, SWHY Securities is effectively 51.2% owned by Central Huijin.

While JIC is the largest shareholder of SWHY Securities and SWHY Group, JIC in fact is an investment holding company under Central Huijin and holds its investment of SWHY Securities and SWHY Group on behalf of the government. JIC is not involved in the operations and management of SWHY Securities. Hence, no affiliate support from JIC has been incorporated into this assessment.

Moody's believes that there is a high probability that the Chinese government would support SWHY Securities in times of need, considering (1) the government and Central Huijin's relatively high ownership in SWHY Securities, and (2) SWHY Securities' position as one of the major securities companies in China.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Moody's could upgrade SWHY Securities' ratings if SWHY's franchise becomes much larger and its presence signals a higher systemic importance to the Chinese financial market, and therefore Moody's assesses a stronger willingness and ability of the Chinese government to support the company.

Moody's could also upgrade SWHY Securities' ratings if the company (1) further improves its funding and liquidity ratios; and (2) maintains its profitability, despite intensifying competition and market fluctuations.

On the other hand, Moody's could downgrade SWHY Securities' ratings if Moody's assesses a weakening in the willingness and ability of the Chinese government to support the company.

Moody's could also downgrade SWHY Securities' ratings if the company (1) encounters a material deterioration in its profitability; (2) experiences a material weakening in its financial position, for example, because of a substantial increase in leverage or a deterioration in its liquidity position; or (3) becomes subject to regulatory sanctions that impair the stability of its franchise and management.

The principal methodology used in these ratings was Securities Industry Market Makers Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1187332. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Headquartered in Shanghai, Shenwan Hongyuan Securities Co Ltd. reported consolidated total assets of RMB353.5 billion as of 31 December 2019.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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 ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Moody's considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody's. Unless noted in the Regulatory Disclosures as a Non-Participating Entity, the rated entity is participating and the rated entity or its agent(s) generally provides Moody's with information for the purposes of its ratings process. Please refer to www.moodys.com for the Regulatory Disclosures for each credit rating action under the ratings tab on the issuer/entity page and for details of Moody's Policy for Designating Non-Participating Rated Entities.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, 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 issued the credit rating is available on www.moodys.com.

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.

Sean Hung, CFA
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
Client Service: 852 3551 3077

Yat Man Sally Yim, CFA
MD-Financial Institutions
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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