China Banking Corporation's (China Bank) Baa2 deposit and issuer ratings are based on the following inputs: (1) the bank's Baseline Credit Assessment (BCA) of baa3; and (2) a one notch rating uplift, owing to our expectation 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 government's rating.
China Bank's BCA of baa3 is underpinned by (1) the bank's long-standing relationships with Chinese-Filipino businesses; (2) its strong capitalization, boosted by the PHP15 billion (around $300 million) rights issuance completed in May 2017; (3) its stable asset quality, which is backed by a robust macroeconomic environment; and (4) the strong support from the bank's key shareholders, particularly the SM Group and its affiliates. We expect the bank to receive strong support from its key shareholders in the form of capital, funding and liquidity.
These strengths are balanced by China Bank's above-industry-average loan growth and high single-borrower concentration, which could pose downside risks to its asset quality. Furthermore, the bank's funding profile is modest compared with that of its rated peers, with high reliance on high-cost corporate deposits, 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 (4 July 2018)
Key Rating Drivers
Standalone Profile Drives IDR: China Banking Corporation’s (CBC) Issuer Default Ratings (IDRs) are driven by its intrinsic credit profile, which reflects a moderate domestic franchise, satisfactory financial performance and adequate balance-sheet buffers. The rating also takes into consideration CBC’s relatively concentrated loan portfolio, conglomerate ownership and risks associated with rapid loan growth over the last few years, which are all common features of many Philippine banks.
Improved Asset Quality: We had upgraded CBC’s asset quality score on the back of continued improvement in its non-performing loan (NPL) ratio and our expectation that its asset quality should remain steady in the near term, supported by its acceptable credit standards and still-benign economic conditions. NPL balances have also declined as the bank worked to address specific issues over the last two years.
Replenished Capital Buffers: CBC’s regulatory Common Equity Tier 1 (CET1) ratio had improved to 13.5% by end-2017 (end-2016: 11.3%) after the PHP15 billion stock rights offering in 1H17. We expect this ratio to decline as loan growth is likely to continue to outpace internal capital generation. However, we believe the bank should be able to replenish these buffers periodically, supported by its major shareholders, and maintain adequate capitalisation over the regulatory minimum in the near term.
Steady Profitability: We expect margins to remain supported by a rising-rate environment and a sustained shift towards higher-yielding consumer and SME loans which should offset the rise in funding cost. The operating cost base (63% of revenue as of end-2017) is likely to remain high as the bank continues its branch expansion strategy over the next two or more years.
Growing Stable Funding Sources: The current account and savings account (CASA) mix has increased to 54% of deposits (2013: 44%) as the bank continues to prioritise low-cost and stable funding sources. The loan to deposit ratio (LDR) remained fairly healthy at 72% at end-2017, and we believe CBC will be adequately placed to meet the local liquidity coverage ratio (LCR) requirement, which is being phased in over 2018-2019.
Moderate State Support: We believe that CBC is a domestic systemically important bank (D-SIB). However, the probability of state support in times of need may be less likely than for its larger peers, taking into account CBC’s more moderate systemic importance (5% of system assets) and sovereign’s fiscal flexibility as indicated by its ‘BBB’ rating.
Source: Fitch Ratings Full Rating Report (13 April 2018)
Capital Intelligence Ratings (CI Ratings or CI) has affirmed China Banking Corporation’s (CBC) Financial Strength Rating (FSR) at ‘BBB’. The rating is underpinned by Bank’s good liquidity position, the sound capital ratios, and the good loan asset quality metrics. The rating also reflects the Bank’s well established franchise and strong relationships with the affluent Chinese-Filipino community, which has provided the Bank with a loyal clientele and a large customer deposit base. The main constraints to the rating are the high cost to income ratio and the volatile non-interest income (NII) and other comprehensive income relating to its large portfolio of investment securities. These two factors are however in common with many of its peers. Another constraint to the rating is the declining trend of profitability ratios which also lag the peer group averages.
CI Ratings has also affirmed CBC’s Long- and Short-Term Foreign Currency Ratings (FCRs) at ‘BBB’ and 'A3', respectively. The Support Rating is also 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 of official support in case of need. The Outlook for all the ratings is maintained at ‘Stable’.
CBC is a mid-sized bank in the Philippines with a good franchise in the commercial and SME segments and strong relationships with the affluent Chinese-Filipino community. Notwithstanding strong economic growth, loan expansion slowed marginally in 2017 and then more noticeably in H1 2018. Loan asset quality indicators however improved in 2017, which contrasted positively against a general slight weakening trend seen across its peers. CBC’s NPL ratio remained low and both loan loss reserve and effective coverage ratios strengthened in both 2017 and H1 2018.
With surplus resources channeled to the investment securities portfolio and in particular government bonds, the Bank’s already comfortable liquidity position strengthened further with all liquidity metrics staying some way ahead of the peer group average. Following the rights issue in 2017, capital ratios have also risen to a sound level. A positive is the high component of Common Equity Tier 1 capital. There was however a slight slippage in capital ratios in H1 2018.
In terms of earnings, the Bank performed well in 2017. The stronger growth of gross revenue was sufficient to cover much higher operating expenses resulting in a rise increase in operating profit. A lower provision charge enabled the Bank to post a double digit increase in net profit in 2017. The Bank’s performance in H1 2018 was constrained by a sizeable decline in NII. The latter was impacted by a fall in fee and commission income and a net loss in dealing securities income. The Bank’s NII will remain subject to potential volatility given its large book of investment securities. The already high cost to income ratio rose further in both 2017 and H1 2018. This trend reflects the cost of the adoption of an acquisition strategy to expand the branch network over the past few years, as well as the recent increases in investments in technology to improve products and services. Thanks to a small write-back of provisions, the Bank was able to limit the decrease in net profit in H1 2018 to a very modest level. Both operating and net profitability ratios however declined in 2017, as well as H1 2018, and remained behind the peer group averages.
Source: Capital Intelligence Full Rating Report (13 September 2018)