HONG KONG, 4 August 2023. CSPI Ratings has affirmed Industrial and Commercial Bank of China’s (ICBC or the Bank) 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 leading market franchise, robust capitalization, resilient asset quality, above-average profitability, and strong funding and liquidity. It also takes into account ICBC’s susceptibility to market volatility. In addition, we believe that the Chinese government (‘AA’/Stable) has an extremely strong willingness to support ICBC in times of need, considering the state ownership, the bank’s status as the largest state-owned bank in China, and its critical role in maintaining financial stability.
The Stable Outlook reflects our view that the Bank 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 the foreign-currency LTICR of the sovereign is downgraded and/or if the government’s willingness to support noticeably weakens.
We would consider upgrading the Bank if the foreign-currency LTICR of China is upgraded and/or if the government’s willingness to support further strengthens.
KEY RATING RATIONALE
Credit Strengths
Extremely strong sovereign support: We believe that the Chinese government’s willingness to support ICBC in times of need is extremely strong, given the Bank’s 70% state ownership directly under Central Huijin, its quasi-policy role in government initiatives, and its systemic importance as the largest state-owned bank in the country. ICBC’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 manufacturing and strategic emerging industries as well as promote economic development and maintain financial system stability.
Leading market franchise: We expect ICBC will continue to maintain its strong business franchise as the largest bank in the world by total assets and loan balance, given its solid customer base, extensive service channels, and diversified business structure. This warrants its status as a global systemically important bank (G-SIB) and a domestic systemically important bank (D-SIB) in China. In recent years, the Bank has had the largest domestic deposit market share of around 11-12%, thanks to its vast network of branches and connections with large state-owned enterprises. In addition, ICBC provides a wide range of products and services, including asset management, insurance, leasing, trust, and investment.
Robust capitalization: We expect ICBC’s capitalization to consistently outperform its state-owned peers, thanks to its good internal capital generation and capital market access. ICBC has continuously enhanced its capitalization over the past few years, with a common equity tier 1 (CET1) capital ratio of 13.70%, tier 1 capital ratio of 15.22%, and total capital adequacy ratio (CAR) of 18.79% as of 31 March 2023.In 2022, ICBC collectively issued RMB220 billion in Tier-2 capital bonds to replenish the Bank’s capital and meet the extra capital requirement. These capital instrument issuances and a lower risk-weighted assets (RWA) growth rate of 2.5% during the year saw the Bank’s capital adequacy ratio rise steadily in 2022.
Resilient asset quality: ICBC’s asset quality will remain stable in our projection over the next 12-18 months, in view of the Bank’s non-performing loan (NPL) resolution and prudent client selection. ICBC’s overall NPL ratio improved to 1.38% in 2022 from 1.42% in 2021, compared favorably to the sector average of 1.63%, despite the fact that the NPL ratio of real estate increased to 6.14% from 4.79% following the collapse of the property industry in 2021. We believe the Bank could manage the credit risk associated with the real estate industry given that the direct exposure to property developers stayed modest at 3.1% of total loans. The Bank’s percentage of loans overdue for more than 3 months was 0.82% in 2022, down from 0.88% in 2021 and 0.90% in 2020. The special-mention loan (SML) ratios have gradually declined to 1.95% in 2022 from 2.92% in 2018. The bank’s provision coverage ratio reached a new high of 209.47% at the end of 2022.
ICBC’s investment assets increased to RMB10.3 trillion at the end of 2022, up by 13.7% from 2021. Bond investment accounted for 95.6% of the investment portfolio, including 81.9% in bonds with minimal credit risk issued by the government, central bank, or policy banks. We expect the credit risk of ICBC’s investment portfolio to be controllable, which is evidenced by a small amount of RMB2.9 billion and RMB3.1 billion in financial instruments classified into Stage 2 and Stage 3, with allowances for impairment losses of RMB1.3 billion and RMB2.7 billion, respectively.
Above-average profitability: We forecast ICBC to maintain competitive profitability due to satisfactory net interest income supported by outstanding market franchise, lower credit costs, and effective cost control. The Bank’s return on average assets (ROAA) and average shareholder’s equity (ROAE) of 0.97% and 11.43%, respectively, compared favorably to the sector average of 0.76% and 9.33% at the end of 2022. The impairment losses declined by 10% from a higher base in 2021. ICBC reported the lowest cost-income ratio among its state-owned peers, despite the ratio slightly increasing to 25.01% in 2022 from 23.97% in 2021.
We expect ICBC’s net interest margin (NIM) to continue thinning at a slower pace in the face of persistent margin compression and a highly competitive deposit market in China, even though it has outperformed the average. ICBC’s NIM descended 19 bps to 1.92% in 2022 as a result of a lower yield on earning assets and a higher funding cost. The bank’s average loan yield came down to 4.05% in 2022 from 4.16% in 2021 due to loan prime rate (LPR) cuts. In response to the government’s call to support the real economy, the Bank offered substantial interest discounts to corporate clients. We note that the yield of financial investments and other assets increased, so the yield of earning assets only fell slightly by 1 bp. Meanwhile, the average cost of deposits edged up to 1.75% from 1.62%, driven by the ongoing deposit competition and time deposit migration.
Strong funding and liquidity: We believe that ICBC will maintain its good funding structure, given its vast retail deposit base and strong connections with large state-owned enterprises underpinning its solid deposit franchise. Customer deposits are the Bank’s primary source of funding. As of 31 December 2022, 82.8% of total liabilities were customer deposits, which amounted to RMB 29.87 trillion. Its retail deposits increased by 16.4% in 2022 and accounted for 48.7% of its total deposits. The Bank also has abundant liquidity, with a liquidity coverage ratio of 118.3% and a net stable funding ratio of 128.8% at the end of 2022, both of which were much higher than the minimum regulatory requirement of 100%.
We anticipate that ICBC and other large state-owned banks will benefit from the risk aversion of market funds when overall confidence in the financial sector deteriorates. Hence, we believe they will have a stronger and more stable liquidity profile in stressed markets than other small and medium-sized banks, whose funding is more vulnerable to market shocks.
Credit Weakness
Susceptible to Economic Volatilities: As the largest bank domestically, ICBC will continue to be sensitive to operating environment volatilities due to its role as a state-owned bank serving the real economy, which may require credit exposures of weaker quality and challenge the Bank’s asset quality under stress scenarios. ICBC’s loan portfolio tracks closely with that of the broader market, with large exposure to transportation, manufacturing, and leasing and commercial services representing 25.1%, 15.5%, and 15.1% of corporate loans at end-2022, respectively.
A high level of global inflation, rising interest rates in major developed economies, and outbreaks of international geopolitical conflicts may slow the world’s economic recovery and increase the fluctuation of global financial markets. Domestically, the slowdown of domestic macroeconomic growth and the tightening of financial regulation have led to increased credit risk exposure in certain regions and industries, which may put pressure on ICBC's business development and asset quality.
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: 31 July 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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