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RPT-Fitch Affirms China's 3 Policy Banks
April 9, 2013 / 9:43 AM / in 5 years

RPT-Fitch Affirms China's 3 Policy Banks

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April 9 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings has affirmed China Development Bank’s (CDB), Agricultural Development Bank of China’s (ADBC), and Export-Import Bank of China’s (ExIm) Long-Term Foreign Currency Issuer Default Ratings (IDRs) at ‘A+’ with Stable Outlook. No Viability Ratings are assigned since the banks act as agents of state policy. A full list of rating actions is below.

Rating Action Rationale

All of the IDRs are based on state support and are at the banks’ Support Rating Floors, which are equivalent to the Long-Term Foreign-Currency IDR of China’s sovereign. This reflects the entities’ quasi-sovereign status as 100% state-owned banks, important policy functions, and the perceived strong willingness and ability of the central government to continue supporting the banks, as it has done since their establishment nearly two decades ago. The ratings generally move in tandem with changes in the sovereign rating.

Rating Drivers And Sensitivities - IDRs and Support Rating

Each bank has a long history of receiving central government support, including capital injections, subsidies and tax breaks from the Ministry of Finance, unlimited access to central bank funding, and compensation for non-performing loans. In addition, all debt securities issued by policy banks carry zero risk-weightings due to their quasi-sovereign status, which results in lower issuance costs and provides indirect support for the banks’ earnings. These factors are reflected in the banks’ Support Ratings of ‘1’. Weakening in the perceived ability or willingness of the central government to continue providing such support could result in downgrades of the banks’ IDRs and Support Ratings and a downward revision of their Support Rating Floors.

All three policy banks, whose combined assets amounted to 22% of GDP at end-2012, play an important role in national economic development, including providing financing for domestic infrastructure projects and pillar industries (CDB); the procurement of agricultural goods and rural development projects (ADBC); and the growth of external trade (ExIm). In addition to these core policy functions, CDB and ExIm provide financing for strategic overseas investments and resource purchases of the Chinese government, while ExIm also extends concessional loans to foreign governments on behalf of the state.

In 2007, the Chinese government announced a broad goal of “commercialising” all three policy banks. Thus far, only CDB has gone through the process, which entailed transformation into a joint-stock company, the introduction of new boards of directors and supervisors, and the expansion of commercial areas of business. Commercialisation has been on hold for ADBC and ExIm since the global financial crisis. Rating downgrades could occur if future commercialisation were to lead to a material change in the banks’ support mechanisms or relationship with the state, or if commercial functions - which generally are not eligible for state support - become more prominent.

Accounting and disclosure are weak in comparison to China’s listed commercial banks. CDB publishes an audited annual report, but no disclosure is provided on certain items. ADBC and ExIm release only a thin set of financials once a year. The limited data that is available shows modest to weak financial strength, due to the banks’ focus on policy over performance.

Figures on non-performing loans are generally low, but Fitch believes these to be understated due to widespread forbearance. Earnings and capital are thin, particularly at ADBC and ExIm, while CDB posts high rates of capital erosion as its profit retention falls far short of asset growth. The banks have lower liquidity risk than commercial peers due to their unlimited access to central bank funding, as well as a closer match of assets and liabilities due to their larger share of wholesale funding.

Growth remained rapid at all three banks in 2012. From 2007 to 2012, annual compounded growth was highest at ExIm (35%) and lowest at ADBC (18%). On average, 83% of asset expansion during this period comprised lending, which constitutes the dominant share of total assets of all three banks. Recent growth at ADBC and ExIm has been increasingly focused on non-traditional policy lending, with roughly one-third of new and outstanding credit going to rural infrastructure development and concessional/other loans, respectively.

The current ratings of China’s policy banks are as follows:

China Development Bank (CDB):

Long-Term Foreign-Currency IDR affirmed at ‘A+'; Stable Outlook

Short-Term Foreign-Currency IDR affirmed at ‘F1’

Support Rating affirmed at ‘1’

Support Rating Floor affirmed at ‘A+’

Senior unsecured USD bonds affirmed at ‘A+’

Agricultural Development Bank (ADBC):

Long-Term Foreign-Currency IDR affirmed at ‘A+'; Stable Outlook

Short-Term Foreign-Currency IDR affirmed at ‘F1’

Support Rating affirmed at ‘1’

Support Rating Floor affirmed at ‘A+’

Export-Import Bank of China (ExIm):

Long-Term Foreign-Currency IDR affirmed at ‘A+'; Stable Outlook

Short-Term Foreign-Currency IDR affirmed at ‘F1’

Support Rating affirmed at ‘1’

Support Rating Floor affirmed at ‘A+’

Senior unsecured USD bonds affirmed at ‘A+'

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