China Bank's Baa2 rating incorporates: (1) its baseline credit assessment (BCA) of baa3; and (2) a one-notch rating uplift, due to our assessment that the bank will receive support from the Government of the Philippines (Baa2 stable) in times of need. The outlook on the long-term ratings is stable, in line with the stable outlook on the Philippines' sovereign rating.
China Bank's BCA of baa3 is underpinned by its long-standing relationships with Chinese-Filipino businesses, strong capitalization boosted by a PHP15 billion (approximately $300 million) rights issuance completed in May 2017, stable asset quality backed by a robust macroeconomic environment, and strong support from key shareholders, in particular Henry Sy affiliated SM Investments Corporation (SMIC, unrated) and Sysmart Corporation (Sysmart, unrated). Moody's expects the bank to receive strong shareholder support from its key shareholders in the form of capital and on the funding and liquidity front. These strengths are balanced by the banks' above industry loan growth and high single borrower concentration that could pose downside risks to its asset quality. Furthermore, the bank's funding profile is modest compared to other rated-peers, with a high reliance on high-cost corporate deposits. Over the next 12-18 months, Moody's expects broad stability in the bank's asset quality given the robust operating environment and the relatively low level of leverage in the economy. The bank's reported nonperforming loans ratio improved to 1.9% at end-2016 from 2.5% at end-2015 due to a faster pace of loan growth.
At the same time, its above industry average growth -- compound annual growth of 19% between 2006-2016 against the system's 16% -- exposes the bank to unseasoned risk. China Bank's high borrower concentration also represents a latent risk to its asset quality, although its exposures are diversified to multiple operating entities within the Philippine conglomerate groups -- a common feature among the rated Philippine banks.
Moody's expects the rights issuance in May will add about 300 basis points to the banks' capitalization level and on a pro-forma basis will bring its common equity tier 1 (CET1) ratio to about 14.2% from 11.3% reported at end-December 2016, comfortably above the minimum requirement of about 10% (assuming a 1.5% D-SIB buffer). In addition, based on Moody's estimates, even after assuming 20%-25% loan growth annually over the next 2-3 years, the bank's capitalization profile will remain above the minimum Basel III requirements.
China Bank's funding profile is somewhat weaker than that of its peers, with depositor concentration increasing significantly over 2016 to fund its somewhat rapid loan growth of 24% over the same period. Nevertheless, Moody's expects stability in the banks' funding profile. In addition, liquid assets -- which represent 31% of the banks' tangible assets at the end of 2016 -- provide some support against downside risks. The banks' rating also takes into account our basic loss-given failure analysis, where creditors are not presumed to absorb losses outside of bank liquidation, since no operational resolution regime is in place in the Philippines.
Source: Moody’s published report (May 31, 2017)
Fitch Ratings has affirmed the Long Term Issuer Default Ratings (IDRs) of China Banking Corporation in February 2017. CBC is among the 10 largest banks in the Philippines with more moderate market shares of around 3%6% by loans, assets and deposits. The bank has generally shown a greater appetite for growth in recent years as it seeks to gain scale and share, but Fitch expects that it will display broadly stable asset quality and profitability backed by acceptable risk controls as it grows.
Fitch expects the Philippines' GDP growth to remain robust in the next one to two years, backed by resilient domestic consumption and investment activity. Headwinds for overseas remittances and business process outsourcing revenues-- two important drivers of domestic consumption may rise, but Fitch still expect both inflow streams to remain broadly resilient for now in the absence of more pronounced and immediate threats.
The current government's plans to accelerate infrastructure spending should provide an added boost to domestic activity, and the authorities retain adequate policy flexibility to offset a weakening in economic conditions or greater financial market volatility. Fitch expects credit growth in the mid to high teens against this backdrop.
Philippine banks' asset quality has generally improved amid the favourable economic backdrop over the last several years. Fitch calculated gross NPL ratios for the banks have fallen to 1.0%2.5% at end2015 from 2.9%8.1% at end2010, and the ratios remained broadly stable in 2016. NPA ratios and NPL coverage ratios have similarly improved in tandem. One exception is CBC, which has experienced some asset quality weakness over the last 23 years due to the acquisition of a weaker bank and various operational issues. Its reported NPL ratio rose to a high of 2.6% at end June 2016 (end2013: 2.0%), but eased to 2.4% at end September as it worked through its problem loans. CBC's reported NPL coverage ratio deteriorated to around 87% at end September 2016 from 147% at end2013, but the ratio has been improving in recent quarters. Fitch continues to monitor these trends and also take into account CBC's historically sound asset quality performance and conservative culture in its assessment.
Capitalisation, funding and liquidity remain healthy for China Bank. Internal capital generation is often insufficient to support the robust growth plans of many of the banks, and they periodically raise fresh capital to maintain adequate buffers above regulatory requirements which are rising for domestic systemically important banks in the Philippines. Fitch expects CET1 hurdles for banks to rise to 10%11% by January 2019 from 8.5% in 2016.
China Bank generally benefit from its ownership by financially strong family/conglomerate shareholders, which have historically provided ordinary capital support when needed although such links also raise concentration and contagion risks within the financial system, which require close monitoring by the authorities. The bank’s healthy funding and liquidity positions stem from the liquid domestic financial system (as indicated by the end 2016 system wide loan/deposit ratio of around 72%, based on the central bank's measure), and their mostly deposit funded balance sheets.
Fitch expects liquidity conditions to tighten gradually, driven by external market factors as well as continued brisk system credit growth. However, system liquidity should remain adequate given the significant pool of funds currently held with the central bank that can be released to meet demand when required.
The Stable Outlooks reflect Fitch's view that the bank's credit profile is likely to remain broadly steady over the next one to two years.
The Support Ratings (SRs) and Support Rating Floors (SRFs) are based on Fitch's expectation of a moderate likelihood of extraordinary state support for the banks, if needed. Our assessment of sovereign support for the privately owned banks in this peer group also take into account the sovereign's ability to provide such support in times of stress, based on its financial position as incorporated in its 'BBB' IDRs, currently on Positive Outlook.
Source: Fitch Ratings press release (Feb 8, 2017)
Capital Intelligence Ratings (CI Ratings or CI) affirms China Banking Corporation’s (CBC) Financial Strength Rating (FSR) at ‘BBB-’ with a ‘Stable’ Outlook. The rating is supported mainly by its good liquidity position and sound profitability. While capital adequacy remains satisfactory, CAR is on a declining trend and is therefore no longer a strong supporting factor. Similarly asset quality, while still generally satisfactory, has seen a rise in non-performing loans (NPLs) and loan loss reserve (LLR) coverage declining to less than full coverage. The position however improved in H1 2016 with LLR coverage rising while the effective coverage ratio remains strong but asset quality remains a constraining factor. In terms of profitability, CBC lagged the peer group in 2015 in most metrics, but only by a little as all Philippine banks struggle with high cost-income ratios and falling net interest margins (NIM) – another constraining factor for the rating. Moreover, H1 2016 performance was much improved, especially at the operating level. In terms of non-financial factors, the 2 FSR also reflects the well established domestic franchise with its large customer deposit base, which continues to be supported by its expanding branch network and its entrenched relationship with the affluent Chinese-Filipino community. The latter continues to provide the Bank with a loyal clientele and a reliable deposit base.
In accordance with CIs’ internal assessment of improving sovereign credit risk in a strongly performing economy, CBC’s Long- and Short-Term Foreign Currency Ratings are also affirmed at 'BBB-' and 'A3', respectively. The Outlook on all ratings is ‘Stable’. The Support Rating is affirmed at ‘3’ in view of the high probability of assistance from CBC’s major shareholders – the Sy family and its financially sound SM Group − as well as the probability official support in case of need.
CBC had traditionally exhibited very strong asset quality metrics and high levels of LLR coverage. This, however, changed somewhat in 2014-15 following the acquisition of PDB. Although this boosted customer deposits and SME segment penetration, it also brought in a loan portfolio that was not as good as that of CBC itself. The integration process also posed IT challenges and these are yet to be fully resolved. The result was a rate of loan growth in 2015 that was well behind that of most other banks in the peer group, a trend that continued into H1 2016 as a much more cautious stance was taken on credit extension.
While capital ratios remain satisfactory (especially in terms of CET-1), the declining trend in CAR may begin to put some downward pressure on the FSR over the medium term unless reversed. Similarly (in common with other banks) CBC has seen pressure on NIM and on operating profitability although in mitigation, this latter trend appears to have reversed in H1 2016.
Source: Capital Intelligence Full Rating Report (October 17, 2016)