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Rating Action:

Moody's assigns first-time ratings to Everbright Securities; outlook stable

 The document has been translated in other languages

14 Aug 2015

Hong Kong, August 14, 2015 -- Moody's Investors Service has assigned Everbright Securities Company Limited a Baa3 long-term issuer rating and a P-3 short-term issuer rating.

The ratings outlook is stable.

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

RATINGS RATIONALE

The Baa3 long-term issuer rating reflects Everbright Securities' standalone credit strength, and a four-notch uplift based on Moody's expectation that there is a very high likelihood that the company would receive support from its parent, China Everbright Group Limited (unrated), and the Chinese government (Aa3 stable), in times of need.

Moody's assumption of support is based on Moody's assessment of Everbright Securities' strategic importance to China Everbright Group, which is in turn a state-owned financial conglomerate.

Everbright Securities is 67% directly and indirectly-owned by China Everbright Group. Unlike most of the securities companies in China, Everbright Securities' operations are integral to its group's core financial business, because it forms one of the key subsidiaries in the group's financial segment, and collaborates closely with the group's other financial subsidiaries, including China Everbright Bank Company Limited (Baa2 stable, ba2) and Sun Life Everbright Life Insurance Company Limited (unrated). Collaborative efforts between the subsidiaries include in the areas of cross-selling, product design and client referrals.

Moody's believes that China Everbright Group's incentive to extend support to Everbright Securities is very high, given the significant reputational risks to the group, should Everbright Securities fail. The reputational risks would arise, due to the use of the Everbright name in the two companies' branding strategies.

Moody's points out that the group has demonstrated a strong track record of providing financial support to Everbright Securities. For example, the group provided operational, and direct as well as indirect liquidity support to Everbright Securities -- through direct guarantees or liquidity support from its financial subsidiaries -- in August 2013, when the company suffered a liquidity crunch due to a trading error incident.

China Everbright Group is wholly owned by the Chinese government through the 44.33% ownership stake in the company by the Ministry of Finance and the remaining 55.67% ownership share by Central Huijin Investment Limited. Central Huijin Investment is the domestic investment arm of China's sovereign wealth fund, China Investment Corp.

Moody's believes that China Everbright Group is strategically important to the Chinese government, given its status as a pioneer state-owned financial conglomerate which owns a bank, an insurance company, a securities company and other financial assets. Its importance must also be viewed in the context of financial market reforms that envisage a greater role in China for various financing channels.

Given that Everbright Securities' operations are important to those of China Everbright Group, Moody's believes that there is a high probability that the government would support Everbright Securities in times of need — through state-owned China Everbright Group — to maintain stability in the Chinese financial system.

STANDALONE CREDIT ASSESSMENT

Everbright Securities is a full service securities company licensed for major securities businesses in China. Brokerage business contributed 44% of its total revenue in 2014, the highest among various business lines.

Moreover, the trading error incident -- which occurred in August 2013 -- resulted in an around RMB523 million fine and forfeiture from the Chinese regulators. The occurrence of the errors reflected weaknesses in its risk management systems.

Moody's notes that like other Chinese securities companies, Everbright Securities has expanded into new businesses, such as wealth management, margin financing & securities lending (MFSL) and stock pledged repo operations. These new businesses introduce additional risks, including market, credit and operational risks, which could pressure its internal controls and risk management systems, particularly in the current challenging operating environment for Chinese securities firms.

While Everbright Securities maintained a strong financial and liquidity position during recent stock market fluctuations, just-implemented government policies, which include restrictions on the sale of securities and the use of 15% of 21 securities firms' (including Everbright Securities) net assets to buy Exchange Traded Funds in the A-share market, have weakened the company's liquidity and net capital ratios (as defined by the China Securities Regulatory Commission). The market downturn is also likely to have a negative impact on revenue growth in the near term.

Everbright Securities' expansion into new geographic areas also highlights the increased risks that the company faces. The most recent such example is its acquisition of a 70% controlling stake in Sun Hung Kai Financial Group Limited (unrated) in June 2015. While there is strategic logic in acquiring a company that operates mainly in Hong Kong, there are intrinsic operating and execution risks attached to acquiring companies in new jurisdictions and with different corporate cultures.

Over the past two years, Everbright Securities has made some changes to its risk management systems and internal controls, including setting up a new Chief Risk Officer and reducing its investment portfolio by disposing of all the stocks purchased during the trading error incident. In addition, the company has increased its medium- to long-term funding sources to mitigate liquidity and refinancing risks. On 5 August, it received regulatory approval to issue up to 600 million shares in a private placement, a development which is positive to its liquidity and capital position.

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.

What could change the rating -- up

The key drivers of an upgrade would be evidence that improvements in risk management after the trading error incident in 2013 have been sustained, as well as an improvement in the overall operating environment for Chinese securities firms. Since the issuer rating already benefits from four notches of support, it is probable that these improvements would initially result in a more favorable assessment of the stand-alone credit profile without necessarily translating into an upgrade of the issuer credit rating unless the improvements were substantial.

What could change the rating -- down

The company's ratings could experience downward pressure if (1) it has any operating difficulties during fluctuations in the Chinese equity market; (2) its financial position deteriorates materially, including substantial increases in leverage and more aggressive liquidity mismatches; and (3) any indication that support to the group from the Chinese government falls or Everbright Securities' importance to the group falls would likely lead to a downgrade of the subsidiary's ratings.

The principal methodology used in these ratings was Global Securities Industry Methodology published in May 2013. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Everbright Securities Company Limited is headquartered in Shanghai. It reported assets of RMB115 billion at end-2014.

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 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 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 rating action, and whose ratings may change as a result of this 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 following information supplements Disclosure 10 ("Information Relating to Conflicts of Interest as required by Paragraph (a)(1)(ii)(J) of SEC Rule 17g-7") in the regulatory disclosures made at the ratings tab on the issuer/entity page on www.moodys.com for each credit rating:

Moody's was not paid for services other than determining a credit rating in the most recently ended fiscal year by the person that paid Moody's to determine this credit rating.

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.

Sean Hung
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

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 assigns first-time ratings to Everbright Securities; outlook stable
No Related Data.
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