HONG KONG, 13 July 2022. Pengyuan International has upgraded the global-scale long-term issuer credit rating (LTICR) on China Construction Bank Corporation (CCB or the Bank) to ‘AA-’ from ‘A+’, one notch below China’s sovereign rating (AA/Stable). Meanwhile, we have also upgraded the short-term issuer credit rating (STICR) on the Bank to ‘A-1+’ from ‘A-1’ accordingly. The Outlook is Stable.
The LTICR upgrade reflects the change in our support willingness assessments on the Chinese government for CCB, to Extremely Strong from Very Strong, based on the latest government-related entities (GRE) criteria published on 4 February 2022.
The Bank’s LTICR incorporates a standalone credit profile (SACP) of ‘a-’, which is edged up from ‘bbb+’ by our upgrade on China’s Banking System Credit Index (BSCI) to ‘bbb’ from ‘bbb-’. The SACP considers the Bank’s robust market franchise, resilient capital buffer, and satisfying net interest margin. It also captures the Bank’s asset quality on its corporate credit and susceptibility to market volatilities. The Stable Outlook reflects our view that CCB will likely 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 if needed.
We would consider lowering the Bank’s rating if the foreign-currency LTICR of China is downgraded, and/or if the government’s willingness to support noticeably weakens.
We would consider raising the Bank’s rating 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
Robust Market Franchise: The Beijing-headquartered lender’s franchise is to remain its dynamism as the second-largest commercial bank in the world on the solid basis of its asset size, deposit mass, and banking services. The Bank’s critical function to economic growth and financial stability anchors its status as a global systemically important bank (G-SIB) and a domestic systemically important bank (D-SIB). CCB enjoyed a deposit market share of about 9.2% at the end-2021, which is supported by its extensive network of branches and service outlets in China and overseas.
Moreover, the Bank has built a well-established presence in bank card and wealth management businesses. With its continuous input in consumer finance businesses, CCB’s domestic credit card loans expanded by a year-on-year increase of 8.5% to RMB896.2 billion by the end-2021, the largest among state banks.
Resilient Capital Buffer: We see CCB’s capital profile as sturdy within our rating horizon, given its decent earnings generation, extensive capital replenishment channels, and track record of keeping a healthy loss-absorption buffer against unexpected volatilities. The bank’s capital adequacy ratios are consistently above the regulatory requirements, with a common equity tier 1 (CET1) capital ratio of 13.6%, tier 1 capital ratio of 14.1%, and total capital adequacy ratio (CAR) of 17.9% at the end-2021. CCB issued RMB145 billion of Tier 2 capital bonds in 2021 to replenish the Bank’s Tier 2 capital and meet the latest total loss-absorbing capacity (TLAC) requirements, boosting CCB’s total CAR to 17.9% from 17.1% at the end-2020.
Satisfying Net Interest Margin: We forecast CCB to keep posting above-average net interest margins (NIM) in the range of 2.16%-2.17% between 2022 and 2024, albeit a shrinking NIM in the banking industry. CCB’s NIM will remain superior to that of its state peers’ given the Bank’s capability to attract sizeable loans of good yield and static deposits of lower cost. That said, the Bank’s NIM slid down to 2.13% in 2021 from 2.19% in 2020 as the average yield of loans came down to 4.25% from 4.39% due to cuts in the central bank’s loan prime rates (LPR) amid the government’s call of lowering the cost for the real economic growth. Meanwhile, the average cost of deposits edged up to 1.67% in 2021 from 1.59% in 2020 driven by the intensified competition in the deposit market.
Extremely Strong State Support: Our latest assessment concludes that the Chinese government will provide the necessary support to CCB in times of need with an “extremely strong” willingness, which was notched up from ‘very strong’, as we considered the Bank’s increased level of policy-driven nature in its products and services demonstrated in the post-pandemic economic recovery. As the second-largest state-owned bank 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, in conjunction with the central government’s social and economic objectives. Any signs of weakening in the sovereign’s willingness or capability to support CCB will pose immediate downgrade pressure on the rating.
Credit Weakness
Corporate Credit Quality Concerns: The Bank’s overall asset quality will stay moderate within our rating horizon if uncertainties arising from its corporate credits maintain containable. The non-performing loans of the Bank are mainly concentrated on corporate customers, accounting for 81.8% of total non-performing loans at the end-2021. The impairment losses of corporate credits eroded 37% of the income this segment generated, bringing down the corporate banking’s contribution to 28.1% from 39.8%. The bank’s special-mention loan (SML) ratio was at 2.69% at the end-2021, the highest among its state bank peers. This suggests that a larger NPL exposure may crystalise amid market headwinds. CCB’s NPL ratios have been declining since 2015, except for the pickup in 2020 when the COVID-19 pandemic hit.
Susceptibilities to Economic Volatility: CCB will continue to be intrinsically subject to swings of economic conditions due to its indispensable mission of promoting economic growth and industrial development. CCB’s loan portfolio tracks closely with that of the broader market, with large exposure to transportation, leasing & commercial services, and manufacturing representing 18.3%, 18.0% and 14.6% of total corporate loans at the end-2021, respectively. Echoing the government’s mandate to promote small and micro businesses, CCB has extended more inclusive finance credits than its peers. Small and micro businesses are conceptually more vulnerable during adverse hiccups. That said, we believe the Bank’s enhanced loan coverage and high provision coverage will help mitigate the potential losses.
Note: Ratings mentioned in this press release are unsolicited ratings.
ANALYST CONTACTS
Primary Analyst
Kaichung Lee
+852 3615 8340
Secondary Analyst
Ke Chen, PhD
+852 3615 8316
Committee Chair
Winnie Guo
+852 3615 8344
MEDIA CONTACT
RATING SERVICES ENQUIRIES
Allen Wei
+852 3615 8324
Date of Relevant Rating Committee: 29 June 2022
Additional information is available on www.pyrating.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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