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 onenotch rating uplift because of our expectation that the bank will receive support from the Government of 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 the bank's (1) stable asset quality; (2) stable capitalization and profitability, which support business expansion; and (3) access to support from its key shareholders in the form of capital, funding and liquidity. These strengths are balanced by China Bank's fast 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 peers we rate, with high reliance on highcost corporate deposits.
Source: Moody’s published report (09 December 2019)
Key Rating Drivers
Rating Driven by Intrinsic Strength: The Long-Term Issuer Default Ratings (IDR) of China Banking Corporation (CBC) are driven by its Standalone Credit Profile. The ratings take into account the company’s moderate domestic franchise, acceptable profitability and asset quality and stable funding and liquidity profile. This is counterbalanced by risk from high loan growth in recent years as well as high single borrower concentration, which are both common traits of many Philippine banks.
Economy Supports Asset Quality: CBC’s non-performing loan ratio of 1.4% at September 2019 remained lower than the industry average of 2.2%, although both ratios have deteriorated modestly. Fitch Ratings believes that the quality of recent rapid credit growth has not been tested over the economic cycle and high single-borrower concentration makes the bank susceptible to impairment shocks. Nevertheless, the broadly supportive environment and the bank’s steady underwriting standards mitigate these risks somewhat.
Adequate Profitability: CBC’s earning profile is the strongest among Fitch-rated mid-sized banks. This is due to its lower reliance on one-off gains and market-related income, which can be more volatile, and generally lower credit costs. We expect profitability to remain broadly steady in the near term, as benefits from improving funding conditions and lower deposit-reserve requirements are likely to be tempered by sustained keen competition in lending.
Capital Buffers to Ease: We expect the bank’s common equity Tier 1 ratio of 12.7% at September 2019 to gradually decline, as risk-weighted asset (RWA) growth is likely to continue to outpace internal capital generation. Nevertheless, we believe the bank will maintain acceptable capitalisation in the near term, backed by its parent entity – SM Investment Corporation.
Primarily Deposit Funded: Funding and liquidity is CBC’s rating strength. CBC sources around 92% of its funding from deposits, of which 53% were low-cost current and savings deposits at September 2019. Its balance sheet also remains liquid, despite rapid loan growth in recent years, as reflected in its loan/deposit ratio of 72%.
Aggressive Expansion: Excessive growth or disproportionate concentration in higher-risk segments, such as unsecured consumer loans, coupled with weakened capital buffers would pressure the bank’s Viability Rating.
Better Risk-Adjusted Returns: Sustained improvement in profitability and earnings through more varied earning sources or improved operating-cost efficiency may be positive for the bank’s ratings. This is assuming that it occurs without excessive risk taking and that other credit metrics remain broadly the same.
Source: Fitch Ratings Report (27 December 2019)
Assigned Issuer Rating: PRS Aaa (corp.)/Stable OutlookA company rated PRS Aaa (corp.) has a very strong capacity to meet its financial commitments relative to that of other Philippine corporates. A PRS Aaa (corp.) is the highest corporate credit rating assigned on the PRS scale.
A Stable Outlook, on the other hand, indicates that the rating is likely to be maintained or to remain unchanged in the next 12 months.
Source: PhilRatings published Report (May 2020)