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Rating Action:

Moody's confirms China Merchants Bank's Baa1 ratings

 The document has been translated in other languages

14 Sep 2015

Hong Kong, September 14, 2015 -- Moody's Investors Service has confirmed China Merchants Bank Co., Ltd.'s (CMB) long-term deposit rating at Baa1, affirmed its short-term deposit rating at P-2, and confirmed the long-term senior unsecured notes of its New York branch at Baa1.

At the same time, Moody's has assigned a Counterparty Risk Assessment (CR Assessment) of A3(cr)/P-2(cr) to CMB and its branches.

The bank's baseline credit assessment (BCA) and adjusted BCA are affirmed at baa3.

The outlook on all ratings is stable.

A full list of the affected ratings can be found at the end of this press release.

These rating actions conclude Moody's review of CMB's ratings for upgrade initiated on 18 June 2015. Moody's review was triggered by the re-assessment of whether to increase the amount of support included in CMB's rating in the context of its market position and shareholding structure.

RATINGS RATIONALE

"We believe the two notches of uplift already incorporated into CMB's rating adequately reflect the very high level of government support, given the bank's own financial strength, its significant market share and its partial ownership by state-owned enterprises," says Sean Hung, a Moody's Assistant Vice President and Analyst.

The bank's Baa1 ratings incorporate its standalone BCA of baa3, and two notches of uplift due to an expected very high level of government support, in case of need.

BASELINE CREDIT ASSESSMENT

CMB's BCA of baa3 remains unchanged despite the more challenging operating environment and the bank's deteriorating asset quality. The bank's annualized new NPL formation rate in the first half of 2015 grew almost twice as fast as in 2014, and its NPL ratio increased to 1.50%, 39 basis points higher than at end-2014.

While these asset quality metrics are more in line with CMB's joint-stock commercial banks peers that have lower BCAs, and mostly weaker than the Big Five banks with which CMB shares its investment-grade BCA, Moody's believes that it has a higher standard of NPL recognition than most joint-stock commercial bank peers.

CMB makes little distinction between its NPL ratio and the ratio of loans that are delinquent for 90 days or more, whereas many other joint-stock commercial banks increasingly do not recognize such delinquent loans as NPLs. CMB's special-mention loan ratio of 2.42% was also lower than its peers.

The baa3 BCA also recognizes CMB's relatively strong loss-absorbing buffers. Its Common Equity Tier 1 ratio of 10.5% at end-June 2015 was the highest among Chinese joint-stock commercial banks, and its strong loan loss reserves of 204.2% at the same date also mitigate the risk of increasing NPLs. Its profitability is also relatively strong, and benefits from its low-cost deposit base and higher-than-average fee income. Its annualized return on assets of 1.33% in the first half of 2015 was the highest among joint-stock commercial banks.

CMB's liquidity position is robust, characterized by a high level of liquid assets and low reliance on market-sensitive funds due to a strong deposit base. Still, in the current challenging operating environment, its liquidity profile is showing signs of weakening. CMB's total deposits grew by only 4.2% in the first half of year, compared to 19% in 2014. In addition, its investment receivables increased to 13.0% of total assets at end-June 2015 from 8.6% at end-2014. These investments, most of which are packaged by other banks, securities firms and trust companies, have relatively weak liquidity since their underlying investments comprise repackaged loans.

GOVERNMENT SUPPORT

Moody's assumes a very high level of government support for CMB in case of need, given its status as the sixth-largest bank in China by assets, with a 2.8% share of system deposits at end-June 2015, its stronger retail focus than most Chinese banks, and its partial ownership by China Merchants Group Limited (CMG, unrated), a wholly state-owned conglomerate.

CMB's largest shareholder is CMG with an approximate 20.94% stake in the bank at end-August 2015 through various subsidiaries. CMG was the tenth-largest state-owned enterprise (SOE) by operating profits in 2014, and is wholly owned by the State-owned Assets Supervision and Administration Commission (SASAC).

The two-notch rating uplift is lower than the three notches afforded to some other joint-stock commercial banks with strong SOE affiliations, such as China CITIC Bank Corporation Limited (Baa1/ba1 stable) and China Everbright Bank Company Limited (Baa2/ba2 stable). In Moody's view, CMB's overall credit profile -- which reflects the combination of its BCA and the assumed level of government support -- supports deposit and senior unsecured debt ratings of Baa1 rather than ratings in the A category.

WHAT COULD CHANGE THE RATING UP/DOWN

An upward adjustment of CMB's BCA and deposit ratings would require the bank to demonstrate a consistent and solid financial performance, against the backdrop of slower economic growth in China, and increasing competition in the banking sector. Specifically, Moody's would look for an end to the current cycle of asset quality deterioration before any upgrade.

CMB's BCA could come under downward pressure if: (1) its core tier 1 capital ratio falls to 9%; (2) its return on assets falls to 0.8%; or (3) its NPL ratio rises above 3%. Since CMB's deposit and senior unsecured debt ratings include less support than for some other joint-stock commercial banks with strong SOE affiliations, it is possible that a lowering of the BCA by only one notch would not result in a downgrade of the deposit and debt ratings.

CR ASSESSMENT

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

The CR Assessment also benefits from two notches of government support, in line with Moody's support assumptions for its deposits. This reflects Moody's view that any support provided by government 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.

Compared with most Chinese banks whose deposit ratings incorporate a very high or high level of government support and whose CR Assessments are positioned at the deposit ratings, CMB's CR Assessment is one notch higher than its deposit rating. This is in line with Moody's global approach that reflects the expectation that the bank's operating liabilities are not likely to default at the same time as the bank's failure. In the case of most other Chinese banks rated by Moody's, the CRA has been positioned at the same level as deposits. The different treatment for CMB reflects the fact that its stand-alone credit profile is relatively strong and that there are only two notches of support in its rating. For other banks where support was a more important driver of the final rating, Moody's considered that it was not appropriate to position the CRA above the deposit rating in China.

The principal methodology used in these ratings was Banks published in March 2015. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

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

China Merchants Bank Co., Ltd. is headquartered in Shenzhen. It reported total assets of RMB5.22 trillion (USD849 billion) at end-June 2015. The bank was 20.2% owned by China Merchants Group at end-June 2015.

LIST OF AFFECTED RATINGS:

China Merchants Bank Co., Ltd.

• Long-term bank deposits confirmed at Baa1

• Long-term senior unsecured MTN confirmed at (P)Baa1

• Short-term bank deposits affirmed at P-2

• Short-term senior unsecured MTN affirmed at (P)P-2

• BCA and adjusted BCA affirmed at baa3

China Merchants Bank Co., Ltd., Hong Kong Branch

• Long-term senior unsecured MTN confirmed at (P)Baa1

• Short-term senior unsecured MTN affirmed at (P)P-2

• Long-term senior unsecured debt confirmed at Baa1

China Merchants Bank Co., Ltd., Luxembourg Branch

• Long-term Senior unsecured MTN confirmed at (P)Baa1

• Short-term Senior unsecured MTN affirmed at (P)P-2

China Merchants Bank Co., Ltd., New York Branch

• Long-term senior unsecured MTN confirmed at (P)Baa1

• Short-term senior unsecured MTN affirmed at (P)P-2

• Long-term senior unsecured debt confirmed at Baa1

China Merchants Bank Co., Ltd., Singapore Branch

• Long-term senior unsecured MTN confirmed at (P)Baa1

• Short-term senior unsecured MTN affirmed at (P)P-2

LIST OF CR ASSESSMENTS:

China Merchants Bank Co., Ltd. and its Hong Kong, Luxembourg, New York and Singapore Branches: A3(cr)/P-2(cr)

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.

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 confirms China Merchants Bank's Baa1 ratings
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