May 23, 2017 / 8:17 AM / 3 months ago

Fitch Affirms China's 5 State Banks at 'A'; Outlook Stable

(The following statement was released by the rating agency) HONG KONG/TAIPEI, May 23 (Fitch) Fitch Ratings has today affirmed the Long-Term Foreign-Currency Issuer Default Ratings (IDRs) of China's five large state-owned commercial banks at 'A' with Stable Outlooks. The Short-Term IDRs were affirmed at 'F1'. A full list of rating actions is at the end of this rating action commentary. The five banks are: Agricultural Bank of China Limited (ABC), Bank of China Ltd. (BOC), Bank of Communications Co., Ltd. (BOCOM), China Construction Bank Corporation (CCB) and Industrial and Commercial Bank of China Limited (ICBC). KEY RATING DRIVERS IDRS, SENIOR DEBT, SUPPORT RATINGS AND SUPPORT RATING FLOORS All of the Long-Term IDRs are based on state support, and are at the banks' Support Rating Floors, reflecting an extremely high probability of extraordinary support from the central government in the event of stress. The banks' Support Ratings (SR) of '1' and Support Rating Floors (SRF) of 'A' reflect their systemic importance and thus an extremely high propensity for the state to support them, if required. Combined, the state-owned commercial banks account for around 38% of sector assets domestically at the end of March 2017 and are viewed as pivotal to the financing of China's economy. The state banks' market shares have been declining over the past few years due to rapid non-loan asset growth at other Chinese commercial banks, in particular joint-stock and city commercial banks, but they remain systemically important to the state in Fitch's view. Fitch believes the state banks continue to play significant roles in supporting domestic growth as well as major roles in financing activities abroad, including expansion by Chinese corporates and infrastructure projects supporting strategic government initiatives, such as the One Belt One Road development plan. Fitch expects tighter market liquidity in 2017, which is aimed at reducing leverage by increasing relative borrowing costs for those entities most exposed to non-loan and non-bank credit. As net liquidity providers, the state banks should benefit from a more favourable outlook for net interest margin. The average corporate borrowing rate for the sector has already increased 19bp since the end of 2016 to 5.63% in March 2017. Although the Chinese authorities have not provided further clarification over domestic systemically important financial institutions (SIFIs), Fitch expects all the state banks to be designated as domestic SIFIs; four of them (ABC, BOC, CCB and ICBC) are already designated as global SIFIs. The central government is ultimately the largest shareholder of all the five state banks, and has a track record of providing solvency and asset-quality support to the banks. Consequently, the banks' SRFs remain closely linked to China's sovereign rating (A+/Stable). As support is not expected to diminish in the foreseeable future, the Outlook on their IDRs remains Stable, unless there is any change to the sovereign rating, which may imply changes in the state's ability or propensity to support the banking system. VIABILITY RATINGS The Viability Ratings (VRs) of China's state banks are in the 'bb' category and remain the highest in the sector. Reduced economic headwinds support the near-term outlook for the state banks, and Fitch expects the banks to be less impacted by changes in regulations or economic challenges given how credit and risks have shifted within the system over the past few years. Relative to other Chinese commercial banks, the state banks generally exhibit superior funding and liquidity, smaller credit exposure and off-balance-sheet activities, and higher loss-absorption capacity. Furthermore, the state banks would likely benefit most from depositor flight to safety, which will provide some support to their VRs in a stress scenario. The state banks are also more likely to act as temporary liquidity providers on behalf of the authorities, if required, where certain parts of the system were under greater liquidity stress. These trends continue to support the higher VRs for state banks relative to other Chinese commercial banks, and Fitch expects greater differentiation in the state banks' financial performances in the future. Financial metrics typically are influenced by the operating environment, which has been negative for some time. This can give rise to heightened challenges to maintain financial stability, but support from various government levels have contributed to the banks reporting financial profiles that compare well with those of many banks in developed markets, although not as well against the profiles of some large banks in emerging markets. The availability of ordinary support from the government and China's deposit-funded banking system give the authorities greater flexibility to work through China's debt problem at their own pace. Recognition of greater asset impairment may only come after the sector has built up further buffers, credit or economic growth is deemed sustainable by China's authorities, or the system is viewed as less vulnerable to contagion. Fitch's analysis of asset quality focuses more on loss-absorption buffers (including factors such as capitalisation, loan-loss reserve coverage, and profitability) than on reported NPL ratios, given the limitations on sector-wide data disclosure and transparency, as well as the significant amount of non-loan credit and the frequency of regulatory intervention to support borrowers. On average, the five state banks had loss-absorption buffers equivalent to around 8% of credit based on end-2016 data (overall Fitch-rated commercial banks in China: around 6%), which show the level of deterioration they can withstand before some form of remedial action would be likely to be required to restore capital to a sustainable level. The magnitude of these buffers has not changed much from the previous review given the state banks have more stable near-term credit growth relative to other commercial banks in China. China's banking system has been accumulating large off-balance-sheet exposures, including through transactions with non-banks, and it is not always clear in such transactions with whom ultimate risks resides. However, the state banks are considered to be less exposed to such activities than other Chinese commercial banks. In addition, entrusted investments, which represent the banks' investments in asset- and wealth-management product plans, made up around 1% of assets for state banks at end-2016, compared with around 19% for mid-tier banks, Fitch estimates. Short tenors, asset-liability mismatches and limited disclosure of underlying assets associated with these investments may pose liquidity risk to the banks, but Fitch expects such risks to be more manageable by the state banks relative to the smaller banks. The state banks' reported profitability is likely to be under less pressure in 2017 than in 2016, as near-term asset quality still benefits from the government's stimulus efforts in 2016. NPL write-offs and disposals also helped in containing reported NPL figures and Fitch expects this to continue in the current year. The state banks' reported provision coverage on average at end-1Q17 reached around 166% with NPL ratio of 1.6%. Fitch expects the authorities to continue to provide support to help resolve underlying problematic credit over the medium term. The five state banks are the best-capitalised in the system; their reported core capital ratios are stable and are above the regulatory minimum. However, their capital may not be sufficient, given the build-up of risk across the financial system as profitability comes under pressure and reduces internal capital generation. In the short term, increased lending to mortgages and investments in local government bonds should slow risk-weighted asset growth (given their lower risk-weights) relative to overall asset growth, which should help support reported capital ratios. SENIOR DEBT AND SUBORDINATED NOTES The senior debt instruments are rated in line with the banks' IDRs of 'A', as they are considered to be unsecured and unsubordinated obligations of the banks. The Tier 2 subordinated (Basel III compliant) note ratings are in accordance with Fitch's hybrid securities criteria, and reflect expectations that the authorities will extend support to the banks to prevent the triggering of non-viability clauses. As such, the anchor rating is the banks' IDRs. However, since the notes are to be fully written down if non-viability is triggered, they are notched twice from the IDRs. SUBSIDIARY AND AFFILIATED COMPANIES Amipeace Limited is a wholly owned special purpose vehicle (SPV) of Bank of China Group Investment Limited in Hong Kong. Azure Orbit II International Finance Limited is an offshore SPV managed by Bank of Communications Financial Leasing Co., Ltd (BOCOM Leasing; A/Stable), a wholly owned subsidiary of BOCOM. ABCL Glory Capital Limited is an offshore SPV wholly owned by ABC Leasing International Corporation Limited (ABCLI), but under the management control of ABC Financial Leasing Corporation Limited (ABC Leasing). Both ABCLI and ABC Leasing are wholly owned subsidiaries of ABC. Inventive Global Investments Limited is an offshore SPV wholly owned by ABC International Holdings Limited (ABCI), which is also a wholly owned subsidiary of ABC. All the SPVs were established with the sole purpose of undertaking offshore debt issuance of their parent entities. As wholly owned subsidiaries, Fitch expects these SPVs to receive very strong support from their ultimate parents in the mainland in the event of repayment strains. In fact, current senior debt issuance by Amipeace Limited is guaranteed by BOC's Macau branch, while Azure Orbit II International Finance Limited's debt is guaranteed by BOCOM's Macau branch. The senior debt issuance by ABCL Glory Capital Limited and Inventive Global Investments Limited are guaranteed by ABC's Hong Kong branch. Hence, the Long- and Short-Term Ratings of these instruments are derived from their parents' at 'A' and 'F1' ratings, respectively. RATING SENSITIVITIES IDRS, SENIOR DEBT, SUPPORT RATINGS AND SUPPORT RATING FLOORS Any changes to the IDRs, SRs and SRFs are most likely to be tied to shifts in the central government's propensity or ability to provide timely extraordinary support to these banks. Persistent rapid growth across the financial system (including non-bank credit extension) means that potential claims on the state continue to increase, and there may be potential erosion of the state's ability to support the banks. However, Fitch believes that absent any negative action on the sovereign rating, support for the state banks is less likely to diminish than would be the case for other Chinese commercial banks. It remains unclear how the adherence to a state-controlled status, as stipulated in BOCOM's ownership reform plans, would affect state support for the state banks. For the time being, the agency does not expect the state's propensity to support the state banks to reduce significantly as long as the banks remain highly influenced by the state (including influence from authorities to extend credit in support of public policy). VIABILITY RATINGS Asset quality is currently a high influencing factor for the VRs of these banks. Credit continues to build up within the financial system and we expect asset-quality pressures to remain, although reduced economic headwinds, if sustained, could help lower the pressures in the short term. Risks within the system have increasingly migrated towards the second- and third-tier banks, and as a result the state banks are likely to be better positioned in a sustained economic downturn. There are also some early signs of stronger enforcement of risk-management regulations, particularly with regard to shadow-banking activities, including broader credit monitoring under the Macro Prudential Assessment (MPA), which incorporates wealth management products (WMP) as part of credit. This may lead to improvements in governance and transparency over time and enable regulators to better quantify and manage systemic risk, which Fitch regards as potentially credit positive for China's financial system. VR upgrades for the state banks are possible if Fitch considers the operating environment to be less of a rating constraint than it has in the past. This would likely be evidenced by greater certainty over regulators' commitment to contain financial risks over growth priorities, credit growth being more sustainable, off-balance-sheet activities reducing or being less of a concern (including due to greater transparency around such activities), greater confidence that reported asset-quality ratios will hold, or the banks having improved loss-absorption capacity (building risk buffers, such as raising of additional capital) or strengthened deposit funding and liquidity. The state banks have made improvements in some of these areas, for example, there are signs of more stable credit growth. However, the resilience of such improvements has yet to be proven if more asset impairment is recognised, or if credit growth accelerates in response to policy actions to support economic growth. The VRs may be downgraded in the absence of willingness by the authorities to maintain stability and allowing risks to become more binding constraints, for example, further excessive on- and off-balance sheet growth rendering capital more vulnerable to deterioration, asset quality deterioration undermining solvency, or funding and liquidity strains. Although much of the sector benefits from a degree of ordinary support from the Chinese authorities in the form of forbearance, whether in relation to on- or off-balance sheet exposures or strict interpretation of prudential limits, the state banks arguably benefit most. However, if this support was to reduce, the state banks' VRs could come under pressure as vulnerabilities would become further exposed. SENIOR DEBT AND SUBORDINATED NOTES The ratings on the senior debt instruments and subordinated notes are primarily sensitive to a change in the banks' IDRs. SUBSIDIARY AND AFFILIATED COMPANIES Any changes to the programme ratings under Amipeace Limited and Azure Orbit II International Finance Limited will be directly correlated to changes in the IDRs of BOC and BOCOM, and any changes to the ratings on the programme and notes under ABCL Glory Capital Limited and Inventive Global Investments Limited will be directly correlated to changes in ABC's IDRs. Changes in the parents' IDRs will reflect any shift in the perceived willingness or ability of China's government to support BOC, BOCOM and ABC in a full and timely manner. The rating actions are as follows: Agricultural Bank of China Limited: - Long-Term Foreign-Currency IDR affirmed at 'A'; Outlook Stable - Short-Term Foreign-Currency IDR affirmed at 'F1' - Support Rating affirmed at '1' - Support Rating Floor affirmed at 'A' - Viability Rating affirmed at 'bb' - USD15 billion medium-term note programme affirmed at 'A'/'F1' - CNY600 million 4.15% senior unsecured notes due 2017 affirmed at 'A' - USD400 million 2.125% senior unsecured notes due 2018 affirmed at 'A' - USD500 million 2.75% senior unsecured notes due 2020 affirmed at 'A' ABCL Glory Capital Limited - USD500 million 2.5% senior unsecured notes due 2021 affirmed at 'A' Inventive Global Investments Limited - USD1.5 billion medium-term note programme affirmed at 'A'/'F1' - USD500 million 2.375% senior unsecured notes due 2019 affirmed at 'A' Bank of China Ltd.: - Long-Term Foreign-Currency IDR affirmed at 'A'; Outlook Stable - Short-Term Foreign-Currency IDR affirmed at 'F1' - Long-Term Local-Currency IDR affirmed at 'A'; Outlook Stable - Short-Term Local-Currency IDR affirmed at 'F1' - Support Rating affirmed at '1' - Support Rating Floor affirmed at 'A' - Viability Rating affirmed at 'bb' - Senior unsecured certificate of deposit programme affirmed at 'A'/' F1' - Senior unsecured euro commercial paper and certificate of deposit programme affirmed at 'A'/'F1' - Senior unsecured medium-term note programme affirmed at 'A'/'F1' - Senior unsecured Bons a Moyen Terme Negociables (BMTN) programme affirmed at 'A' - Chinese yuan senior unsecured notes (issued by Bank of China Taipei Branch) affirmed at 'A' /'AA+(twn)' - Chinese yuan senior unsecured notes (issued by Bank of China London, Singapore, Sydney, Luxembourg, Paris, Abu Dhabi, New York and Johannesburg Branches) affirmed at 'A' - US dollar senior unsecured notes (issued by Bank of China Hong Kong, Macao, Dubai and Singapore Branches) affirmed at 'A' - Singapore dollar senior unsecured notes (issued by Bank of China Singapore Branch) affirmed at 'A' - Euro senior unsecured notes (issued by Bank of China Hungarian Branch) affirmed at 'A' - Euro senior unsecured notes (issued by Bank of China (Luxembourg) S.A. and guaranteed by BOC's Luxembourg Branch) affirmed at 'A' - Australian dollar senior unsecured notes (issued by Bank of China Sydney Branch) affirmed at 'A' - Basel III-compliant Tier 2 subordinated notes affirmed at 'BBB+' Amipeace Limited: - Senior unsecured, guaranteed medium-term note programme affirmed at 'A' - USD300 million 2.375% guaranteed notes due 2017 affirmed at 'A' - USD300 million 3.125% guaranteed notes due 2019 affirmed at 'A Bank of Communications Co., Ltd.: - Long-Term Foreign-Currency IDR affirmed at 'A'; Outlook Stable - Short-Term Foreign-Currency IDR affirmed at 'F1' - Support Rating affirmed at '1' - Support Rating Floor affirmed at 'A' - Viability Rating affirmed at 'bb-' - Senior unsecured euro medium-term note programme (EMTN) under Bank of Communications Hong Kong Branch and notes issued under the programme affirmed at 'A'/'F1' - Chinese yuan senior unsecured notes (issued by Bank of Communications Hong Kong Branch) affirmed at 'A' - Basel III-compliant Tier 2 subordinated notes affirmed at 'BBB+' Azure Orbit II International Finance Limited: - Senior unsecured medium-term note programme affirmed at 'A' - USD500 million 3.375% senior unsecured notes due 2019 affirmed at 'A' - USD385 million 3.125% senior unsecured notes due 2020 affirmed at 'A' - EUR100 million senior unsecured notes due 2018 affirmed at 'A' China Construction Bank Corporation: - Long-Term Foreign-Currency IDR affirmed at 'A'; Outlook Stable - Short-Term Foreign-Currency IDR affirmed at 'F1' - Long-Term Local-Currency IDR affirmed at 'A'; Outlook Stable - Short-Term Local-Currency IDR affirmed at 'F1' - Support Rating affirmed at '1' - Support Rating Floor affirmed at 'A' - Viability Rating affirmed at 'bb' - Basel III-compliant Tier 2 subordinated notes affirmed at 'BBB+' Industrial and Commercial Bank of China Limited: - Long-Term Foreign-Currency IDR affirmed at 'A'; Outlook Stable - Short-Term Foreign-Currency IDR affirmed at 'F1' - Support Rating affirmed at '1' - Support Rating Floor affirmed at 'A' - Viability Rating affirmed at 'bb' Contact: Primary Analyst (ICBC, BOCOM, ABC) Grace Wu Senior Director +852 2263 9919 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central, Hong Kong Primary Analyst (BOC, CCB) Katie Chen Director +886 2 8175 7614 Secondary Analyst (BOC, CCB) Grace Wu Senior Director +852 2263 9919 Secondary Analyst (ICBC, BOCOM) Jack Yuan Associate Director +86 21 5097 3038 Secondary Analyst (ABC) Jaclyn Wang Associate Director +86 21 5097 3189 Committee Chairperson Tim Roche Senior Director +61 2 8256 0310 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: Additional information is available on Applicable Criteria Global Bank Rating Criteria (pub. 25 Nov 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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