HONG KONG, 8 August 2022. Pengyuan International has upgraded the global-scale long-term issuer credit rating (LTICR) on Industrial and Commercial Bank of China (ICBC 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 follows our assessment of the ‘Extremely Strong’ willingness of government support, which was uplifted from ‘Very Strong’ per the scoring metrics defined in our latest government-related entities (GRE) criteria published on 4 February 2022.
The rating incorporates ICBC’s standalone credit profile (SACP) of ‘a-’ which captures the Bank’s robust market franchise, above-average net interest margin, and sustainable capital buffer. It also considers concerns over its corporate credit quality and susceptibility to market volatilities. ICBC’s SACP enhanced to ‘a-’ from ‘bbb+’ on the upward adjustment of China’s Banking System Credit Index (BSCI) to ‘bbb’ from ‘bbb-’. The Stable Outlook mirrors the Stable Outlook of China’s sovereign rating and reflects our expectation of the government’s stable support willingness.
We would consider lowering the Bank’s rating if China’s sovereign rating is downgraded, and/or if the government’s willingness to support noticeably weakens.
We would consider raising the Bank’s rating if China’s sovereign rating is upgraded, and/or if the government’s willingness to support further strengthens.
KEY RATING RATIONALE
Credit Strengths
Leading Market Franchise: ICBC will continue to maintain a strong business position as the largest bank in the world in terms of total asset and loan balance, given its solid customer base, extensive service channels and diversified business structure. This secures its status as a global systemically important bank (G-SIB) and a domestic systemically important bank (D-SIB) in China. The Bank dominates the largest domestic deposit market share of around 11-12% in recent years through its vast network of branches and connections with large state-owned enterprises (SOEs). In addition, ICBC offers a wide range of products and services including asset management, insurance, leasing, trust, and investment.
Lukewarm Profitability Recovery: The Beijing-based lender will be keeping a stable and competitive profitability from 2022 to 2024. The second most profitable state bank’s returns on average shareholder’s equity (ROAE) and average assets (ROAA) increased to 12.15% and 1.02% in 2021 from 11.95% and 1.00% in 2020, respectively, due to the satisfactory net interest income and substantial contributions from its trading and investment segments. ICBC reported the lowest cost-income ratio among its state-owned peers, despite the ratio slightly increased to 24.0% in 2021 from 22.3% in 2020.
We projected ICBC’s net interest margin (NIM) to be low in the face of persistent pressure on loan interest and fierce competition for deposits in the industry. ICBC’s NIM descended to 2.11% in 2021 from 2.15% in 2020, as the average loan yield came down to 4.16% in 2021 from 4.26% in 2020 driven by cuts in loan prime rate (LPR). In response to the government’s call to support the real economy, the Bank offered significant interest discounts to corporate clients. ICBC’s track record of satisfying profitability and pricing power on its high-yielding large-scale sizeable retail loans helps offset the burden of narrowing interest spreads in the industry.
Robust Capital Management: We expect ICBC’s capitalization to rise steadily within our rating horizon given its strong capital funding capabilities and sufficient internal capital generation. The Bank’s capitalization metrics outperformed its state-owned peers’ with a common equity tier 1 (CET1) capital ratio of 13.3%, tier 1 capital ratio of 14.9%, and total capital adequacy ratio (CAR) of 18.0% at the end of 2021, providing a healthy loss-absorption buffer for its loan book. ICBC collectively issued RMB100 billion of perpetual bonds, RMB90 billion of Tier-2 capital bonds, and USD6.16 billion of offshore perpetual bonds in 2021 to replenish the Bank’s capital to meet the phase-in capital requirement of G-SIB and total loss-absorbing capacity (TLAC) frameworks, boosting ICBC’s total CAR to 18.0% in 2021 from 16.9% in 2020.
Moderate Asset Quality: ICBC’s asset quality will be enhanced during 2022-2024 as a result of the Bank’s prudent risk management and client selection. ICBC’s NPL ratios have declined to 1.42% in 2021 from 1.62% since 2016, except for the temporary pickup amid the COVID-19 pandemic in 2020. The Bank’s special-mention loan (SML) ratios have also diminished to 1.99% in 2021 from 3.95% in 2017, while the provision coverage ratio reached a recent high of 205.8%. Notwithstanding, ICBC’s asset quality is also challenged by the slowdown in economic growth momentum and the adverse impact of the property sector in China.
Extremely Strong Sovereign Support: We expect an extremely strong willingness from the Chinese government to provide ICBC with extraordinary support when needed, considering the sizeable government ownership of about 70.3% and the Bank’s critical government-related entities (GRE) status. The support willingness in our assessment changed to ‘extremely strong’ from ‘very strong’ according to the recent update of our GRE criteria. ICBC has functioned as a quasi-government agency on multiple fronts for decades, which intensifies the incorporation of public policies into the Bank’s objectives blueprint and decision-making processes. We believe this dynamic will continue in the medium to long term.
Credit Weaknesses
Corporate Credit Impairment Concerns: ICBC’s impairment losses on corporate credit will remain our primary concern in the following 12-18 months. ICBC’s corporate loans grew by about 9.8% in 2021, and the segment portfolio represented 59.0% of total loans at the end of the year. The Corporate Banking unit contributed approximately RMB398 billion of the operating income in 2021 to the Bank, of which approximately 41.0% was offset by the segment’s impairment losses. Nonetheless, we take comfort in the Bank’s overall asset quality risks as ICBC’s top-10 lending customers account for only around 5.0% of total domestic corporate loans at end-2021. The Bank’s manufacturing industry exposures are fairly distributed across different sub-categories, with certain exposures being partially covered by third-party or government-sponsored guarantees for policy reasons.
Susceptible to Headwinds: ICBC will continue to be inherently sensitive to various operating environment headwinds as the Bank is tasked with meeting funding needs in the context of a larger national strategy, which might require exposure to lower or weaken its credit quality. A severe deterioration in ICBC’s risk management, underwriting guidelines, and credit controls led to a deterioration in the Bank’s asset quality metrics, capital buffers, and risk-adjusted returns, which could subsequently have a direct downward impact on its SACP.
Note: Ratings mentioned in this press release are unsolicited ratings.
ANALYST CONTACTS
Primary Analyst
Kaichung Lee
+852 3615 8340
Secondary Analyst
Stella Shi
+86 755 8287 2106
Committee Chair
Winnie Guo
+852 3615 8344
MEDIA CONTACT
RATING SERVICES ENQUIRIES
Allen Wei
+852 3615 8324
Date of Relevant Rating Committee: 25 July 2022
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)
Rating Symbols and Definitions (7 May 2018)
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