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Rating Action:

Moody's downgrades Guangzhou Rural Commercial Bank to Baa3, outlook stable

 The document has been translated in other languages

11 Jun 2021

Hong Kong, June 11, 2021 -- Moody's Investors Service has downgraded Guangzhou Rural Commercial Bank Co., Ltd. (GRCB)'s long-term/short-term deposit ratings to Baa3/P-3 from Baa2/P-2.

Moody's has also downgraded GRCB's baseline credit assessment (BCA) and adjusted BCA to ba2 from ba1, long-term/short-term Counterparty Risk Assessment (CR Assessment) to Baa3(cr)/P-3(cr) from Baa2(cr)/P-2(cr), and long-term/short-term Counterparty Risk Ratings (CRRs) to Baa3/P-3 from Baa2/P-2.

The downgrade reflects Moody's expectation that it will be challenging for GCRB to restore its profitability and asset quality to levels in line with its similarly rated peers in the next 12-18 months.

The outlook is now stable.

This concludes the review initiated on 19 March 2021.

A full list of affected ratings and assessments is at the end of this press release.

RATINGS RATIONALE

Moody's expects GRCB's profitability will only rebound slightly in 2021 and remain lower than its similarly rated peers, challenged by its less diversified revenue structure and elevated credit costs as it resolves its legacy impaired loans and continues to reform its wealth management products (WMPs) to comply with new asset management regulations.

The decline of GRCB's return on average assets (ROA) to 0.55% in 2020 from 0.95% in 2019 was significant and higher than that of many of its similarly rated domestic peers, mainly due to the decline in the bank's loan yields and the increase in impairment losses as the bank disposed certain WMPs.

New nonperforming loan formation due to the bank's legacy impaired loans and structural adjustments in Chinese economy will remain a key risk to GRCB's asset quality. The bank's loan growth has outpaced the industry average in recent years, bringing unseasoned risks to its lending portfolio. Meanwhile, the bank's asset quality is sensitive to uneven recovery of the Chinese economy, due to its large exposure to small and micro enterprises and sizable exposures to cyclical sectors.

GRCB's capitalization will also be challenged by its weaker internal capital generation when compared with similarly rated domestic bank peers, despite the private placement approved by shareholder meeting in June 2021 to replenish capital by issuing up to 1.34 billion domestic shares and 305 million H shares. GRCB's reported Common Equity Tier 1 (CET1) capital was 9.2% as of the end of 2020, decreasing from 10.0% at the end of 2019.

Despite the challenges in asset quality, capital and profitability, the bank's liquidity profile will remain solid in the coming 12-18 months. Its reliance on market funds was lower than most similarly rated domestic bank peers, benefiting from its established network in townships in Guangzhou, a large retail deposit base and close ties with village organizations and local government agencies. It also had adequate liquid resources to cover its market funds.

GRCB's rating is based on China's Moderate+ Banking System Macro Profile. Its BCA is ba2, and its ba2 Adjusted BCA does not incorporate any affiliate support. China does not have an operational bank resolution regime, as a result, Moody's applies its basic Loss Given Failure approach to rating GRCB's debt securities and assumes a high level of support from the Chinese government in times of need. Given this, GRCB's deposit ratings, Counterparty Risk Assessment and Counterparty Risk Ratings incorporate two notches of uplift.

Moody's assessment of government support reflects the bank's position as the fourth largest rural commercial bank in China and the only listed regional commercial bank incorporated in Guangzhou, as well as the role it plays in the development of Guangzhou. Furthermore, the Guangzhou government holds 18.22% of the bank's shares as of the end of 2020.

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

Moody's could upgrade GRCB's ratings if the Government of China's (A1 stable) capability or willingness to support the bank increases, or if the BCA is upgraded.

Moody's could upgrade GRCB's BCA if the bank grows its loan book at a more measured pace, and if its (1) asset quality improves, with its impaired loans to gross loans consistently below 2%; (2) profitability improves, with its ROA consistently above 0.8%; and (3) capital strengthens, with its CET1 ratio consistently above 9.5%.

Moody's could downgrade the bank's ratings should the Chinese government's capability or willingness to support the bank weaken.

Furthermore, there could be downward rating pressure if GRCB's operating environment weakens significantly -- for example, if China's economic growth moderates or if loose monetary policies lead to a significant increase in the bank's corporate financial leverage, or its BCA is downgraded.

Moody's could downgrade GRCB's BCA if its (1) asset quality deteriorates, with its impaired loans to gross loans above 4%; (3) profitability weakens, with its ROA below 0.25%, (3) capital weakens, with its CET1 ratio below 8%; or (4) liquidity conditions deteriorate, with its market funds/tangible banking assets above 30%.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Banks Methodology published in March 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1261354. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Guangzhou Rural Commercial Bank Co., Ltd., which is headquartered in Guangzhou, reported assets of about RMB1.03 trillion as of December 2020.

The local market analyst for these ratings is Yulia Wan, +86 (212) 057-4017.

LIST OF AFFECTED RATINGS/ASSESSMENTS

Downgrades:

..Issuer: Guangzhou Rural Comm Bank Co., Ltd.

.... Adjusted Baseline Credit Assessment, Downgraded to ba2 from ba1

.... Baseline Credit Assessment, Downgraded to ba2 from ba1

.... Short-term Counterparty Risk Assessment, Downgraded to P-3(cr) from P-2(cr)

.... Long-term Counterparty Risk Assessment, Downgraded to Baa3(cr) from Baa2(cr)

.... Short-term Foreign and Local Currency Counterparty Risk Ratings, Downgraded to P-3 from P-2

.... Long-term Foreign and Local Currency Counterparty Risk Ratings, Downgraded to Baa3 from Baa2

.... Short-term Foreign and Local Currency Deposit Ratings, Downgraded to P-3 from P-2

.... Long-term Foreign and Local Currency Deposit Ratings, Downgraded to Baa3 from Baa2, Outlook Changed to Stable from Rating Under Review

Outlook Action:

..Issuer: Guangzhou Rural Comm Bank Co., Ltd.

....Outlook, Changed To Stable From Rating Under Review

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 unsolicited.

a.With Rated Entity or Related Third Party Participation: YES

b.With Access to Internal Documents: NO

c.With Access to Management: NO

For additional information, 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 http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1263068.

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.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK 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.

Chen Huang
Senior Vice President
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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