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Rating Action:

Moody's upgrades China Guangfa Bank to Baa3

 The document has been translated in other languages

19 Jan 2017

Hong Kong, January 19, 2017 -- Moody's Investors Service has upgraded China Guangfa Bank Co., Ltd.'s (CGB) long-term and short-term foreign currency deposit ratings to Baa3/P-3 from Ba1/NP.

The bank's baseline credit assessment (BCA) is affirmed at ba3. Its adjusted BCA has been upgraded to ba1 from ba3, and its Counterparty Risk Assessment (CR Assessment) has been upgraded to Baa2(cr)/P-2(cr) from Ba1(cr)/NP(cr).

The outlook on all the ratings is stable.

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

The rating actions conclude Moody's review of CGB's ratings for upgrade initiated on 17 October 2016. Moody's review was triggered by China Life Insurance Co Ltd's (China Life, financial strength Aa3 negative) completion of the acquisition of an additional 23.686% stake in CGB in August 2016, which brought its total stake in the bank to 43.686%.

RATINGS RATIONALE

The bank's Baa3 rating reflects its standalone BCA of ba3, and three notches of uplift, due to increasing external support. In particular, Moody's has incorporated two notches of affiliate support and one notch of government support in the bank's long-term deposit rating.

The upgrade of CGB's long-term deposit rating was driven by:

1) The strategic importance of CGB to China Life and China Life Insurance (Group) Company (CLIC, unrated) (and collectively, China Life Group);

2) The increasing cooperation between CGB, China Life Group and the related subsidiaries;

3) China Life's position as the bank's largest shareholder, with an influence on the bank's management after its share acquisition;

4) China Life's strong capacity to support CGB, given the insurer's strong capitalization and good profitability, with a BCA at a1.

Moody's believes China Life will support CGB in times of need, because the bank is an important part of China Life Group's strategy to provide a full range of financial services to attract customer loyalty and reap cross-selling opportunities.

China Life's investment in CGB accounted for around 15% of its shareholder's equity and 2% of its total assets, which is still well below the regulatory requirement of an investment in a single entity not exceeding 20% of its total assets.

The two sides have increased cooperation since 2016, and have proposed increasing the limit of related-party transactions between CGB and China Life for a variety of services. Moody's says that the two sides will likely cooperate further in future, in areas such as customer development, product development and cross-selling, channel integration, and mid- and back-office services.

Moody's points out that CGB's chairman, president and one of the vice president are either currently working or have worked for China Life Group, facilitating the cooperation between the two entities.

In terms of government support, Moody's has considered the bank's entrenched position in the banking sector — as a nationwide joint-stock commercial bank with a sizable market share of system deposits and loans of around 1% — as well as its significant presence in Guangdong Province, where it is headquartered.

Such support could be channeled either directly to the bank or through China Life Group.

As for CGB's BCA, the ba3 BCA is unchanged because on the one hand, the bank could benefit from an expanding customer base, potential deposit flows and increasing fee-based incomes, due to its cooperation with China Life Group and the related subsidiaries, and, with China Life as its largest shareholder, it would be easier for CGB to raise capital.

On the other hand, the cooperation between CGB and China Life Group will take time to significantly affect the bank's fundamentals, and the bank faces asset quality challenges over the next 12-18 months, given China's slower GDP growth and CGB's large exposure to small- and medium-sized enterprises.

At end-2015, CGB's 90+ day loan delinquency ratio was 3.15% of total gross loans and its special mention loans 5.48%.

Moody's points out that the cooperation between CGB and China Life Group would specifically benefit the bank in expanding its client base in large enterprises and infrastructure projects.

However, credit costs will continue to rise, because of the challenging environment in which the bank operates — in particular, due to the slowing growth in the Chinese economy (Aa3 negative) — and also because CGB exhibits high levels of special mention loans and overdue loans when compared with its domestic peers.

WHAT COULD CHANGE THE RATING UP

CGB's deposit ratings incorporate a high level of affiliate support. Consequently, an increase in the bank's strategic importance to China Life Group, could place upward pressure on CGB's ratings.

CGB's BCA will unlikely rise in the coming 12-18 months, due to the challenging operating environment.

Nevertheless, its BCA could experience upward pressure if: (1) its operating environment, as measured by its Macro Profile, improves; or (2) its asset quality, profitability and funding profile improve — despite the slower economic growth in China — while its capital position strengthens.

WHAT COULD CHANGE THE RATING DOWN

Any reduction of CGB's strategic importance to China Life Group would put negative pressure on CGB's ratings.

CGB's BCA and deposit ratings could also experience downward pressure if: (1) the operating environment weakens materially, i.e., if China's economic growth continues to slow, or corporate financial leverage continues to rise; (2) its asset quality indicators deteriorate, as measured by rising nonperforming loans or rising impairment charges; (3) its capital position weakens, due to rapid asset growth; or (4) its reliance on wholesale funding increases.

The principal methodology used in these ratings was Banks published in January 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

China Guangfa Bank Co., Ltd. is headquartered in Guangzhou. It reported assets totaling RMB1.84 trillion (approximately USD283 billion) at end-2015.

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

Ratings List:

• Long-term/short-term (foreign currency) bank deposit ratings upgraded to Baa3/P-3 from Ba1/NP, outlook changed to stable from review for upgrade

• BCA affirmed at ba3

• Adjusted BCA upgraded to ba1 from ba3

• CR Assessment upgraded to Baa2(cr)/P-2(cr) from Ba1(cr)/NP(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 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.

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

Minyan Liu
Associate Managing Director
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

No Related Data.
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