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Rating Action:

Moody's reviews Guangzhou Rural Commercial Bank for downgrade

 The document has been translated in other languages

19 Mar 2021

Hong Kong, March 19, 2021 -- Moody's Investors Service has placed Guangzhou Rural Commercial Bank Co., Ltd. (GRCB)'s Baa2/P-2 long-term/short-term deposit ratings, ba1 Baseline Credit Assessment (BCA) and ba1 Adjusted BCA on review for downgrade. Moody's has also placed the bank's all other ratings and assessments on review for downgrade. The previous outlook on GRCB was negative.

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

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

The review for downgrade follows GRCB's preliminary earning announcement on 12 March 2021 that its net income declined about 35% in 2020 compared with a year ago, and reflects the decline of the bank's profitability and potential deterioration of its asset quality and capital ratios.

The decline of GRCB's net income in 2020 was significant and higher than that of many of its rated domestic peers. This indicates that the bank was impacted more than its rated domestic peers by risks in its lending and investment portfolio, partly due to the impact of the coronavirus pandemic and the implementation of the new asset management regulations. The bank also disposed of certain existing wealth management products, resulting in the increase in impairment losses. Moody's estimates that this could in turn dampen its return on average assets to below 0.60% in 2020, which was a significant decline from 0.95% in 2019.

Moody's expects that new nonperforming loan (NPL) formation amid structural adjustments in the Chinese economy will remain a key risk to GRCB's asset quality. The bank's loan growth has outpaced the industry average, bringing unseasoned risks to its lending portfolio. Its asset quality is sensitive to economic adjustments, given its large exposure to small and micro enterprises, and sizable exposure to the wholesale and retail sectors and property developers.

The bank's reported NPL ratio increased slightly to 1.8% as of the end of June 2020 from 1.7% at the end of 2019, while its Stage 3 loan ratio under IFRS 9 increased significantly to 3.6% as of the end of June 2020 from 2.6% at the end of 2019, indicating pressure on its asset quality.

GRCB's tangible common equity (TCE) capital ratio will also be challenged by its relatively weak internal capital generation when compared with rated domestic bank peers. GRCB's reported Common Equity Tier 1 capital and total capital adequacy ratios were 9.4% and 13.4% respectively as of the end of June 2020, decreasing from 10.0% and 14.2% respectively at the end of 2019. The bank withdrew its A-share IPO plan in December 2020, and has not released a concrete capital replenishment plan yet.

Despite the challenges in asset quality, capital and profitability, the bank's liquidity profile will remain largely stable in the coming 12-18 months. Its reliance on market funds was lower than most 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.

The review for downgrade on GRCB's Baa2/P-2 long-term/short-term deposit ratings and all other ratings and assessments reflects the review for downgrade on the bank's ba1 BCAs.

During the review period, Moody's will assess the drivers of the deterioration and the forward-looking view of the bank's asset quality, profitability and capital. In addition, Moody's will review the strategy of the bank to bring these back to levels that are more in line with our expectations for its ba1 BCA peers. Moody's will also review the bank's plans to replenish capital, if any.

GRCB's rating is based on China's Moderate+ Banking System Macro Profile. Its BCA is ba1, and its ba1 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 June 2020, including a 3.73% stake held by Guangzhou Financial Holdings Co., Ltd., a state-owned financial holding company established in Guangzhou.

The bank's BCA and ratings upgrade is unlikely given the current review for downgrade. Its BCA and ratings could be confirmed if the bank maintains sound credit metrics in line with its current ratings and assessments.

The bank's ratings could be downgraded should the Chinese government's capability or willingness to support the bank weaken.

Furthermore, there could be downward rating pressure if the operating environment weakens significantly, for example, if China's economic growth moderates or if corporate financial leverage increases significantly as a result of loose monetary policies.

GRCB's BCA and ratings could also be downgraded if the bank's asset quality and profitability weaken significantly; risk-weighted assets grow rapidly and lead to a weaker capital position; or liquidity conditions deteriorate.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Banks Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1147865. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Headquartered in Guangzhou, Guangzhou Rural Commercial Bank Co., Ltd. reported assets of about RMB972 billion at 30 June 2020.

The local market analyst for these ratings is Yulia Wan +86.21.2057.4017.

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

....Adjusted Baseline Credit Assessment, Placed on Review for Downgrade, currently ba1

....Baseline Credit Assessment, Placed on Review for Downgrade, currently ba1

....Long-term Counterparty Risk Assessment, Placed on Review for Downgrade, currently Baa2(cr)

....Short-term Counterparty Risk Assessment, Placed on Review for Downgrade, currently P-2(cr)

....Long-term Counterparty Risk Rating (Foreign and Local Currency), Placed on Review for Downgrade, currently Baa2

....Short-term Counterparty Risk Rating (Foreign and Local Currency), Placed on Review for Downgrade, currently P-2

....Long-term Deposit Rating (Foreign and Local Currency), Placed on Review for Downgrade, currently Baa2, outlook changed to Rating Under Review from Negative

....Short-term Deposit Rating (Foreign and Local Currency), Placed on Review for Downgrade, currently P-2

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

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: NO

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 https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.

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.

Ray Heung
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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