HONG KONG, 13 September 2023. CSPI Ratings has upgraded China Merchants Bank Co., Ltd.’s (CMB or the Bank) global-scale long-term issuer credit rating (LTICR) to ‘A+’ from ‘A’, and affirmed the short-term issuer credit rating (STICR) of ‘A-1’. The Outlook is Stable.
The ratings upgrade is due to the uplift of the Bank’s standalone credit profile (SACP) to ‘a-’ from ‘bbb+’, driven by the Bank’s strengthened capital profile, together with its strong retail franchise, outperforming profitability, strong funding and liquidity, and above-average asset quality. It also takes into account the Bank’s susceptibility to market volatility and uncertainties from the new management.
The ratings also incorporate our external support analysis of the Bank’s systemic importance and the Chinese government’s strong willingness to extend extraordinary support in times of need. The Stable Outlook reflects our view that CMB’s resilient internal capital generation and solid loss-absorption buffer will help maintain a healthy asset quality profile amid the market challenges.
We would consider lowering the Bank’s rating if CMB’s capital and provision buffer weaken sharply as a result of a significant deterioration in asset quality or if the possibility of government support noticeably weakens.
We would consider raising the Bank’s rating if the Bank’s profitability or capital profile show substantial enhancements or if the government’s willingness to support further strengthens.
KEY RATING RATIONALE
Credit Strengths
Capital enhancement supported by profitability: We expect CMB’s capitalization to be robust, supported by its resilient earnings generation and abundant capital replenishment channels. CMB has continuously enhanced its capital profile in recent years, accumulating a healthy loss-absorption buffer against unexpected volatilities and keeping its capitalization at the highest level among joint-stock banks. In 2022, the Bank’s CET-1 capital ratio rose steadily due to its profit retention through satisfying profitability and moderate growth of risk-weighted assets during the year. CMB reported a CET-1 capital ratio of 13.09%, Tier 1 capital ratio of 14.99%, and total capital adequacy ratio of 17.09% as of 30 June 2023.
Robust retail franchise: We believe that CMB continues to enjoy the competitive edge in retail banking businesses, considering its stable low-cost deposits, advanced retail banking technology, and established wealth management business. As the largest joint-stock bank in China, CMB’s service networks are widely distributed and mainly concentrated in developed regions of China. CMB had 184 million retail customers at the end of 2022, the most among Chinese joint stock banks, and the balance of assets under management (AUM) from retail customers was RMB12,120 billion, an increase of 12.68% as compared with the end of 2021. CMB’s strong retail operation also supports a solid funding base, lower earnings volatility than peers, and higher-quality loan assets.
Good funding and liquidity: We anticipate that CMB will maintain its good funding structure, thanks to its fast-growing and vast retail deposit base in China. The Bank has also reduced its reliance on wholesale market funding. As of 31 December 2022, customer deposits accounted for 82.6% of its total liability, which was significantly higher than the joint-stock banks’ median of 62.6%. The customer deposits increased by 18.9% in 2022, following a deposit growth of 12.7% in 2021 and 16.2% in 2020. Among its customer deposits, retail deposits accounted for 42%, totaling RMB 3,104 billion, up by 36%.
CMB also has adequate liquidity, with a liquidity coverage ratio of 164.9% and a net stable funding ratio of 131.8%, both of which were much higher than the minimum regulatory requirement of 100%. CMB has kept loan growth below deposit growth in the past three years. It reported a loan-to-deposit ratio of 89.3% at the end of 2022, compared to 87.7% at the end of 2021, lower than that of most joint-stock banks.
Outperforming profitability: CMB’s profitability metrics will outperform its peers in our projection over the next 12-18 months, underpinned by its steady growth of net interest income, satisfying fee income contribution, and effective cost control. CMB’s returns on average assets (ROAA) and returns on average shareholder’s equity (ROAE) increased to 1.42% and 17.06% from 1.36% and 16.96% in 2021, respectively, compared favorably to the sector average of 0.76% and 9.33% at the end of 2022.
As CMB endeavors to grow retail loans of higher yield and secure demand deposits of lower cost, we expect that CMB’s above-average net interest margin (NIM) will remain largely stable with a minor decrease in the face of industry-wide margin compression. Despite a slight decline in net fee income during 2022 due to the market volatility, CMB’s net fee income contribution to total operating income has maintained a high level of 26%-28%, providing diversification benefits. The cost-income ratio trended down to 29.07% in the first half of 2023, down from 32.88% in 2022 and 33.12% in 2021, while the ratio of larger peers rose during the same period.
Above-average asset quality with high provision: CMB’s asset quality will remain stable in our projection for 2023-2025, in view of its prudent asset risk management, non-performing loan resolution, and strict asset classification. Albeit a slight increase to 0.96% in 2022, the Bank’s overall non-performing loan (NPL) ratio has been below 1%, compared favorably to the sector average of 1.63%, which was also the lowest among joint-stock banks. The ratio of non-performing loans to the loans overdue for more than 90 days was 1.41. The provision coverages for total loans and NPLs were 4.32% and 450.8% as of 31 December 2022, which were much higher than the industry averages of 3.36% and 205.85%, respectively, and both were in the leading position among peers.
In particular, the NPL ratio of real estate increased to 4.08% in 2022 from 1.41% following the collapse of the property industry in 2021. However, CMB managed to reduce its exposure to the property sector and diversify credit to the manufacturing sector. The Bank’s real estate loan exposure has contracted to RMB375.9 billion at the end of 2022 from RMB401.7 billion at the end of 2021, and the proportion of real estate exposure to total loans fell to 6.21% from 7.21%. We also note that over 85% of property development loans were located in the urban areas of economically developed regions. Hence, we believe the liquidity of real estate enterprises will be mitigated with government support, and such concerns with real estate exposure will be largely containable.
CMB’s financial investments saw an increase of around 27% during 2022, amounting to RMB2.78 trillion. The investment portfolio consists mainly of bond instruments issued by the government and the policy banks, with a large proportion of around 87.5% at the end of 2022. CMB intensified reducing the balance of non-standard investments in accordance with the regulation. As of 31 December 2022, the non-standard investments were RMB126,698 million, accounting for 4.57% of total financial investments, down by 1.4% compared to end-2021. The Bank’s investment assets in the second and third stage of the expected credit loss model amounted to RMB5.28 billion and RMB34.27 billion, increasing RMB1.08 billion and RMB10.08 billion, respectively, with allowances for impairment losses of RMB49.98 billion at the same time.
Strong government support: We believe that the government will have a strong willingness to support CMB in times of need, given the Bank’s domestically systemic importance. As the 7th largest commercial bank by assets overall, CMB was officially designated as a D-SIB in 2021 and 2022 and assigned to the same relative bucket 3 as Bank of Communications and Industrial Bank. We believe it is highly likely that it would have significant impacts on the financial system and the real economy should it fail.
Credit Weaknesses
Uncertainty from new management: Mr. Liang WANG, who has worked at CMB for 27 years, was appointed as the new president to ensure consistency in senior management and Bank's development strategy. No evidence has been found of significant deficiencies in the Bank’s corporate governance so far. We believe the Bank’s corporate governance mechanism was sound and stable, and the influence of the legal action against the former president was limited, but further attention will be needed on the potential changes in its strategy and risk priorities.
Vulnerability to economic volatility: We believe CMB will continue to be sensitive to a high degree of market volatility as the largest joint-stock bank in China. CMB’s 2022 corporate loan portfolio tracks closely with that of the broader market, with large exposure to transportation, manufacturing, and real estate each representing 8.14%, 7.70%, and 6.21% of total loans, respectively. We also have concerns over the Bank’s potential NPL exposure. In particular, we note that around 27.25% of the Bank’s special mention loans (SML) migrated to the NPL category in 2022, and the SML ratio increased to 1.21% at the end of 2022 from 0.84% at the end of 2021.
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 CMB'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 August 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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