HONG KONG, 11 July 2023. CSPI Ratings has affirmed China Construction Bank Corporation’s (CCB) global-scale long-term issuer credit rating (LTICR) of ‘AA-’ and short-term issuer credit rating (STICR) of ‘A-1+’. The Outlook is Stable.
The Bank’s LTICR incorporates a standalone credit profile (SACP) of ‘a-’, which considers its outstanding market franchise, strong capitalization, improving asset quality, above-average profitability, and robust funding and liquidity. It also takes into account CCB’s susceptibility to economic volatility, with asset quality and profitability expected to remain under pressure. In addition, we believe that the Chinese government (‘AA’/Stable) has an extremely strong willingness to support CCB in times of need, given the state ownership, the Bank’s irreplaceable importance to the financial system, and its quasi-policy role in government initiatives.
The Stable Outlook reflects our view that CCB will remain an integral part of the Chinese financial system and, as such, the government will continue to have an extremely strong willingness to provide support.
We would consider downgrading the Bank if China's sovereign rating were to decline due to a weakening of the country's fiscal strength and/or a diminishment in the government's willingness to support CCB. The latter could be signaled by a substantial change in CCB's ownership or a shift in public policy priorities.
We would consider upgrading the Bank if the LTICR of the sovereign is upgraded and/or the government’s willingness to support further strengthens.
KEY RATING RATIONALE
Credit Strengths
Extremely strong state support: We expect the government’s willingness to support CCB in times of need to be extremely strong, given the Bank’s state ownership of 57% directly under Central Huijin as of the end of 2022, its critical importance to the government, and its global systemically important position.
As one of the six officially designated large state-owned banks in the country, CCB has an irreplaceable position in the domestic financial market, especially in the fields of infrastructure construction and housing mortgages. CCB’s long-term strategy is, to a large extent, formulated with public policy in mind. This is reflected in management’s publicly stated strategic statement to support the government’s objectives to shore up strategically important industries and maintain systemic and social stability. Furthermore, we believe the Bank’s current market position, profitability, and capital level are fully supportive of its sustainable role as a critical government-related entity.
Outstanding market franchise: We expect CCB’s market franchise to remain robust, considering its position as the second largest commercial bank in the world and in China in terms of asset size and deposit mass. These warrant its status as a global systemically important bank (G-SIB) and a domestic systemically important bank (D-SIB). CCB had a stable domestic market share of around 10% in loans and deposits at the end of 2022, supported by its extensive network of 14,356 branches and service outlets and a full range of businesses providing comprehensive financial services. The Bank has a competitive advantage in the infrastructure finance and housing sectors. As of the end of 2022, CCB’s loans to the infrastructure sector and residential mortgages amounted to RMB 5.71 trillion and RMB 6.48 trillion, respectively, both of which are the largest among the Large State-owned Banks (‘LSOB’).
Strong capitalization: We see CCB’s capital profile as strong, with a common equity tier 1 (CET1) capital ratio of 13.19%, a tier 1 capital ratio of 13.86%, and a total capital adequacy ratio (CAR) of 17.88% on 31 March 2023. CCB has continuously improved its capital profile over the past three years by maintaining stable profitability and issuing capital instruments. In 2022, the Bank successfully issued Tier 2 capital bonds of USD 2 billion and RMB 100 billion and undated additional Tier 1 capital bonds of RMB 40 billion. In March 2023, the Bank issued Tier 2 capital bonds of RMB 20 billion. We note that CCB’s capitalization metrics have been consistently higher than the sector average and the LSOB average, which helps to support its business development across the bank.
Improving asset quality: We expect CCB to maintain stable asset-quality metrics due to manageable non-performing loan (NPL) formation on the back of continuous economic recovery and the Bank’s NPL resolution. CCB’s NPL ratio improved to 1.38% at the end of 2022 from 1.42% at the end of 2021, despite the real estate NPL ratio rising to 4.4% from 1.9%. Its NPL ratio was compared favorably to the sector average of 1.63% but slightly weaker than the LSOB average of 1.27%. Its direct exposure to developers stayed at a modest 4% of loans. The exposure to mortgages with delivery issues in its outstanding mortgage loans was minimal. The special mention loan (SML) ratio decreased to 2.52% at the end of 2022 from 2.69% at the end of 2021. The provision coverage ratio was stable at 241.53% at the end of 2022, compared to the sector average of 205.85% and the LSOB average of 251.42%.
CCB’s financial investment amounted to RMB 8.54 trillion at the end of 2022, 87% of which were bonds issued by the government, central bank, or policy banks. There was a small amount of RMB 19.94 billion in financial instruments categorized as ‘high risk’ by the bank, with an allowance of RMB 17.27 billion.
Above-average profitability: CCB is expected to consistently report higher profitability compared to the sector average and LSOB peers thanks to a higher net interest margin (NIM) underpinned by outstanding market franchise and stringent cost management. In 2022, CCB’s NIM slid down to 2.02% from 2.13% in 2021, as the average yield of loans was down to 4.17% from 4.25% due to cuts in the central bank’s loan prime rates (LPR) amid a government call to lower costs for real economy growth. Meanwhile, the average cost of deposits edged up to 1.73% in 2022 from 1.67% in 2021, driven by intensified competition in the deposit market.
Despite the contraction in NIM, CCB reported net income of RMB 323.17 billion in 2022, up 6.33% from RMB 303.93 billion in 2021, due to the expansion of earning assets and lower credit costs. The return on average shareholder’s equity (ROAE) and average assets (ROAA) slightly declined to 12.27% and 1.00% from 12.55% and 1.04% in 2021, respectively.
Robust funding and liquidity: CCB’s funding and liquidity positions are broadly stable, supported by its strong funding franchise and vast retail deposit base. As of 31 December 2022, CCB had customer deposits of RMB 25.02 trillion, which accounted for 78.87% of its liabilities. Its retail deposits increased by 15.89% in 2022 and accounted for 52.24% of its total deposits. It reported a loan-to-deposit ratio of 83.62% as of 31 December 2022, compared to 82.28% and 78.49% at the end of 2021 and 2020, respectively. We expect a further increase in CCB’s loan-to-deposit ratio to be modest despite the need for continued loan growth to support China’s economic recovery. Its liquidity coverage ratio and net stable funding ratio remained solid at 148.96% and 127.88%, respectively. We expect CCB and other large state-owned banks to benefit from the risk aversion of market funds when overall confidence in the financial sector weakens. Hence, we believe they will have stronger and more stable liquidity positions in stressed market conditions compared to other small and medium-sized banks, whose funding is more susceptible to market shocks.
Credit Weakness
Susceptible to economic volatility: As the second-largest bank domestically, CCB will continue to be subject to a high degree of market volatility due to its role in serving the real economy and stabilizing the financial system. CCB’s loan portfolio tracks closely with that of the broader market, with large exposure to leasing and commercial services, transportation, and manufacturing representing 9.77%, 9.71%, and 8.43% of total loans at the end of 2022, respectively.
The complex and challenging international and domestic situations are likely to continue to put pressure on CCB’s asset quality and earnings. The frequent outbreaks of international geopolitical conflicts and simmering Ukraine crisis, spillover effects of interest rate hikes in developed economies, and risk events at Silicon Valley Bank and Credit Suisse may negatively affect the world’s economic growth and increase the volatilities of global financial markets. Domestically, the relatively weak foundation of economic recovery, the mounting pressure in the property and LGFV sectors, the increasingly stringent regulatory requirements, and the intensifying market competition increase the difficulties for CCB to control its asset-quality risk and deliver stable earnings.
Note: The ratings mentioned in this press release are unsolicited ratings.
ANALYST CONTACTS
Primary Analyst
Ke Chen, PhD
+852 3615 8316
Secondary Analyst
Long Qing, CFA
+86 755 2348 3690
Committee Chair
Winnie Guo
+852 3615 8344
MEDIA CONTACT
RATING SERVICE CONTACT
Allen Wei
+852 3615 8324
allen.wei@cspi-ratings.com
Date of Relevant Rating Committee: 30 June 2023
Additional information is available on www.cspi-ratings.com
Related Criteria
Global Bank Rating Criteria (16 August 2019)
Government-Related Entities Rating Criteria (31 August 2018)
Rating Symbols and Definitions (7 May 2018)
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