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 (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
Source: Moody’s published report (18 December 2018)
Key Rating Drivers
Standalone Profile Drives IDRs: The Issuer Default Ratings (IDRs) of China Banking Corporation (CBC) are driven by its intrinsic credit profile, which takes into account its acceptable balance-sheet buffers, satisfactory profitability and asset quality and moderate franchise. The ratings also take into consideration the risks from rapid loan growth, conglomerate ownership and relatively high single-borrower concentration, which are common features of many Philippine banks.
Steady Asset-Quality Performance: CBC’s gross non-performing loan (NPL) ratio and NPL coverage improved to 1.2% and 121% by September 2018, respectively, from 2.5% and 87% at end-2015 due to its asset remediation efforts. These metrics are the strongest among Fitch-rated medium-sized banks. Higher interest rates may raise asset-quality pressures, but we expect any deterioration to be modest given the still broadly supportive economic environment.
Rising Rates Benefit Margins: We expect net interest margins to expand further as CBC continues to reprice its loans, but gains are likely to be offset by slightly higher credit costs and ongoing investments in distribution and IT. As such, we expect CBC’s profitability to be steady in the near term. Beyond this, the bank’s plans to boost branch sales performance could strengthen its profitability, if executed well.
Acceptable Capitalisation: CBC’s common equity Tier 1 ratio of 12.2% at end-2018 formed a satisfactory buffer for the bank to grow in the near term and withstand credit stresses. We expect capital ratios to decline gradually as the growth of risk-weighted assets is likely to outpace organic capital retention. Nonetheless, we expect the bank to maintain adequate capital buffers over the regulatory requirement in the near term. Its major conglomerate shareholder supports its ability to raise new equity capital, if needed.
Generally Stable Funding, Liquidity: CBC is funded primarily by deposits (94% of funding). The proportion of current and savings accounts rose to 57% of total deposits by end-September 2018 (end-2013: 44%) amid the bank’s efforts to raise lower-cost funds, though the ratio remains lower than the large banks’ average (70%). The loans-to-deposits ratio also remained fairly healthy at 73% as at September 2018 despite rapid loan growth in recent years.
Moderate State Support: We believe that there is a moderate probability of extraordinary state support for the bank, if needed. This takes into account the bank’s moderate systemic importance, as reflected in its roughly 5% market shares in assets and loans, as well as the Philippine sovereign’s fiscal position, which is captured in its ‘BBB’ rating.
Source: Fitch Ratings Full Rating Report (01 March 2019)
The issuer rating of China Banking Corporation (China Bank) takes into account the bank’s growth strategy which supports expansion in scale, market reach and product base, while maintaining its solid franchise on its core market, synergies with its strong shareholder and experienced management, sound asset quality, improvements in funding profile, and the favorable outlook of the domestic banking industry.
China Bank’s core banking franchise is anchored mainly on its 98-year history in the Philippines, which started by mainly servicing the needs of the Chinese-Filipino commercial sector. China Bank’s brand franchise continues to expand, magnified by its acquisitions in recent years that reflect its goal to grow further in scale, market reach, and product base.
Source: PhilRatings published Report (18 February 2019)