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Rating Action:

Moody's confirms CCB Brazil's ratings, outlook negative

15 Dec 2017

New York, December 15, 2017 -- Moody's Investors Service today confirmed China Construction Bank (Brasil) S.A.'s (CCB Brazil) long-term global local and foreign currency deposit ratings of Ba1 and Ba3 as well as the Brazilian national scale deposit ratings of Aaa.br and BR-1, long- and short-term respectively. Moody's also confirmed CCB Brazil's senior unsecured MTN program rating of (P)Ba1 and subordinated debt rating of Ba2. The baseline credit assessment (BCA) of b2 and adjusted BCA of ba1, as well as counterparty risk assessments (CRA) of Baa3(cr) and Prime-3(cr), long- and short-term respectively, were also confirmed. The bank's other ratings were not affected by this action. The outlook is changed to negative(m) from rating under review.

At the same time, Moody's confirmed China Construction Bank (Brasil) S.A., Cayman's long-term MTN program rating of (P)Ba1 and CRAs of Baa3(cr) and Prime-3(cr), long- and short-term respectively.

The following ratings and assessments assigned to China Construction Bank (Brasil) S.A. were confirmed:

Long-term global local-currency deposit rating of Ba1, with negative outlook

Long-term global foreign-currency deposit rating of Ba3, with stable outlook

Long-term senior unsecured MTN program rating of (P)Ba1

Long-term subordinated debt rating of Ba2

Long-term Brazilian national scale deposit rating of Aaa.br

Short-term Brazilian national scale deposit rating of BR-1

Baseline credit assessment of b2

Adjusted baseline credit assessment of ba1

Long-term counterparty risk assessment of Baa3(cr)

Short-term counterparty risk assessment of Prime-3(cr)

Outlook Actions:

..Issuer: China Construction Bank (Brasil) S.A.

Outlook, Changed To Negative(m) From Rating Under Review

The following ratings and assessments assigned to China Construction Bank (Brasil) S.A. were not affected:

Short-term global local-currency deposit rating of Not Prime

Short-term global foreign-currency deposit rating of Not Prime

The following ratings and assessments assigned to China Construction Bank (Brasil) S.A., Cayman were confirmed:

Long-term senior unsecured MTN program rating of (P)Ba1

Long-term counterparty risk assessment of Baa3(cr)

Short-term counterparty risk assessment of Prime-3(cr)

RATINGS RATIONALE

The confirmation of CCB Brazil's ratings takes into account the recent BRL1.2 billion capital injection received from its parent, China Construction Bank Corporation (CCB, A1 stable, baa2) in 17 October 2017, which raised CCB Brazil's tier 1 capital ratio above the 6% minimum regulatory requirement. The new capital position will allow CCB Brazil to absorb additional credit costs as it continues to clean up legacy problem loans. However, the bank's core profitability remains weak because of still modest business volume origination and high operating expenses, and any uptick in credit costs will lead to further losses that could hurt capital metrics and delay the stabilization of its performance.

Moody's acknowledges management's efforts to turnaround CCB Brazil's operations, which include problem loan charge offs and loan sales in the past couple of years. These actions have led to a lower problem loan ratio of 2.87% in June 2017, from 4.14% one year prior. Moreover, the strategic shift in the bank's loan book, which is increasingly focused on less risky payroll loans and on large corporates, away from risky lending to small and mid-sized companies, has supported the gradual decline observed in new problem loan formation. If sustained, this shift could signal a positive trend for credit costs in 2018.

The confirmation of CCB Brazil's ratings and assessments reflects the ratings agency's view that the bank's financial performance will begin to stabilize in 2018. The negative outlook reflects the challenges associated with the implementation of the bank's business strategy, while also focusing on improving asset quality and achieving consistent core profits. At the same time, high loan loss provisions and operating expenses continue to hurt the bank's bottom line result, particularly as the domestic economy reports only an incipient recovery. The bank's financial performance in 2017 will very likely remain weak, as evidenced by sizable mid-year 2017 net losses of BRL564.4 million, which are however lower than one year prior.

Management is also working on repositioning the bank's franchise, and has already reduced the branch network to one quarter of its size in 2015. In regards to funding and liquidity, CCB Brazil benefits from sizable funding lines from its parent, which alleviates funding costs. As of June 2017, liquid banking assets accounted for 33.5% of CCB Brazil's tangible banking assets.

Moody's notes that a potential positive move in CCB Brazil's standalone BCA would not depend entirely on a larger capital position, but also on the bank's ability to maintain strong capital buffers through consistent origination of recurring earnings and adequate asset quality metrics.

Moody's continues to assume a very high probability of affiliate support from CCB to its Brazilian subsidiary, resulting in a four-notch uplift to the Ba1 long-term local-currency deposit rating, from the bank's b2 standalone BCA. The negative outlook on CCB Brazil's Ba1 deposit rating also reflects its likely downgrade if the bank's standalone BCA of b2 moves down, even with a very high affiliate support.

WHAT COULD CHANGE THE RATING -- DOWN/UP

The standalone BCA of CCB Brazil could be upgraded if the bank reports consistent material improvement of profitability and asset quality metrics. Moreover, the bank would need to maintain good capital buffers over authorities' minimum required levels. An upward move in CCB Brazil's standalone BCA could also result in an upgrade of its global local currency rating.

Conversely, CCB Brazil's standalone BCA could be downgraded if the bank continues to report large credit costs and consistent net losses, therefore, consuming the capital injected at the bank. The downgrade of CCB Brazil's standalone BCA would result in a downgrade of the bank's global local currency deposit.

The principal methodology used in these ratings was Banks published in September 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Moody's National Scale Credit Ratings (NSRs) are intended as relative measures of creditworthiness among debt issues and issuers within a country, enabling market participants to better differentiate relative risks. NSRs differ from Moody's global scale credit ratings in that they are not globally comparable with the full universe of Moody's rated entities, but only with NSRs for other rated debt issues and issuers within the same country. NSRs are designated by a ".nn" country modifier signifying the relevant country, as in ".za" for South Africa. For further information on Moody's approach to national scale credit ratings, please refer to Moody's Credit rating Methodology published in May 2016 entitled "Mapping National Scale Ratings from Global Scale Ratings". While NSRs have no inherent absolute meaning in terms of default risk or expected loss, a historical probability of default consistent with a given NSR can be inferred from the GSR to which it maps back at that particular point in time. For information on the historical default rates associated with different global scale rating categories over different investment horizons, please see https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1060333.

China Construction Bank (Brasil) S.A. is headquartered in São Paulo, Brazil, with assets of BRL24.1 billion and shareholders' equity of BRL741 million as of 30 June 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.

Alexandre Albuquerque
Vice President - Senior Analyst
Financial Institutions Group
Moody's America Latina Ltda.
Avenida Nacoes Unidas, 12.551
16th Floor, Room 1601
Sao Paulo, SP 04578-903
Brazil
JOURNALISTS: 800 891 2518
Client Service: 1 212 553 1653

M. Celina Vansetti-Hutchins
MD - Banking
Financial Institutions Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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