Pengyuan International Affirms ‘A+’ Rating of China Construction Bank; Outlook Stable - Ratings - Ratings Actions

HONG KONG, 24 June 2021. Pengyuan International has affirmed China Construction Bank Corporation’s (CCB) global-scale long-term issuer credit rating (LTICR) of ‘A+’ and short-term issuer credit rating (STICR) of ‘A-1’. The Outlook is Stable.
CCB’s ratings incorporate a standalone credit profile (SACP) of ‘bbb+’, which considers the bank’s competitive market franchise, resilient financial strength, and above-average profitability. In addition, we believe that the Chinese government (‘AA’/Stable) has a very strong willingness to support CCB in times of need, given the bank’s ownership structure, systemic importance to the financial system, and critical quasi-policy role. CCB’s asset quality experienced certain deterioration amid COVID-19 situations in 2020 but the overall credit profile was in fact relatively robust. Loan repayment moratorium measures extended by the sovereign have helped mitigate the hit of pandemic-driven economic downturn.
The Stable Outlook reflects our view of China’s sovereign rating outlook in the foreseeable future.
We would consider lowering the bank’s rating if the foreign-currency LTICR of China is downgraded and/or if the sovereign rating outlook is revised to negative due to severe deterioration in the country’s fiscal strength.
We would consider raising the bank’s rating if the foreign-currency LTICR of China is upgraded, albeit relatively low likelihood in the near term.

KEY RATING RATIONALE
Credit Strengths
Competitive Market Franchise: We expect CCB’s franchise to stay distinctive, considering its second largest asset base among commercial banks in the world, long-term affinity to heavyweight corporates with global operational footprints, and exclusive access to the funding of policy initiatives where the bank facilitates as a government agency, all of which warrant its franchise sustainability and status as a global systemically important bank (G-SIB). CCB’s deposit market share in China was at about 9.4% at end-2020, only after Industrial and Commercial Bank of China’s 11.5%, supported by its extensive network of branches and service outlets in the local market.
Resilient Financial Strength: CCB will maintain a healthy financial profile within the rating horizon of 12 to 18 months given its track records and performance metrics during the pandemic outbreak in 2020, especially the satisfactory net interest margin, ample liquidity coverage, and good capitalization. We noticed moderate worsening in the bank’s general asset quality profile during the period. Credit costs measured by impairment losses over average loans increased to 1.20% in 2020 from 1.14% in 2019 while non-performing loan (NPL) ratio swelled to 1.56% from 1.42% and special mention loans (SML) migration ratio expanded to 20.02% from 15.97%. Notwithstanding, we regard the associated risks as containable. The bank accumulated an abundant loss-absorption buffer with a common equity tier 1 (CET1) ratio of 13.6% at end-2020, the highest among state-owned banks.
Satisfactory Net Interest Margin: Our forecast incorporates a shrinking net interest margin (NIM) for CCB which is in line with the sector trend, but the NIM is expected to remain superior to that of its peers’ based on the bank’s competitive franchise, effective cost control, and sound balance sheet management. According to CCB’s 2020 annual report, its NIM contracted to 2.19% in 2020 from 2.32% in 2019 as its average loan interest rate came down to 4.39% from 4.55%, mainly driven by the central bank’s cuts of loan prime rates. Meanwhile, average deposit interest rate marginally edged up to 1.59% from 1.57% amid fierce competition for deposits in this period.
Very Strong State Support Potential: As one of the six officially designated large state-owned banks in the country, CCB’s long-term strategy is, to a large extent, in conjunction with the central government’s social and economic objectives. This key element is often reflected in management’s publicly stated strategic statement to support the national development plans, shore up strategically important industries, and maintain financial stability. This is evident from the bank’s continuous contribution to micro, small, and medium enterprise (MSME) financing and the Greater Bay Area development. CCB’s systemic importance also suggests that its potential failure may be detrimental to the stability of the domestic and global financial systems. Hence, the Chinese government has a very strong incentive to provide liquidity and capital support to the bank if needed.
Credit Weaknesses
Susceptible to Economic Headwinds: CCB will continue to be intrinsically subject to swings of financial market and broader economic conditions due to its status as one of the state banks tasked with the missions of promoting economic growth and industries development. This operating nature per se has posed challenges to the bank’s asset quality and may have a dragging effect on the SACP if key indicators sour materially.
Notable Corporate Credits Concerns: CCB’s NPL ratio and impairment losses of corporate credits are likely to keep hovering above those of other loan segments, which might take a toll on CCB’s credit health especially under stress events. Substantial exacerbation of the bank’s corporate credit quality could constrain CCB’s SACP and/or trigger a downgrade. NPL ratio of the bank’s corporate lending segment hiked to 2.56% at end-2020 from 2.47% at end-2019 while that of its personal lending stayed intact at 0.41%. Corporate banking contributed an operating income of around RMB284 billion in 2020, of which about 51.5% was wiped out by the segment’s impairment losses.

Note: Ratings mentioned in this press release are unsolicited ratings.

ANALYSTS CONTACT
Primary Analyst
Kaichung Lee
+852 3615 8340
kaichung.lee@pyrating.com
Secondary Analyst
Ke Chen, PhD
+852 3615 8316
ke.chen@pyrating.com
Committee Chair
Winnie Guo
+852 3615 8344
winnie.guo@pyrating.com
MEDIA ENQUIRIES
Charley Lui
+852 3615 8296
charley.lui@pyrating.com
RATING SERVICES ENQUIRIES
Allen Wei
+852 3615 8324
allen.wei@pyrating.com
Date of Relevant Rating Committee: 4 June 2021
Additional information is available on www.pyrating.com

Related Criteria
Global Banking Rating Criteria (16 August 2019)
Government-Related Entities Rating Criteria (31 August 2018)

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