HONG KONG, Jan. 11 /Xinhua-PRNewswire/ -- Xinhua Far East China Ratings ("Xinhua Far East") today assigned the issuer credit ratings for the following six Chinese national joint-stock commercial banks:
Bank Name Stock Code Long-term Outlook Rating
Issuer Rating
Bank of
Communications
("BoComm") HK 3328 AA Stable
China Merchants
Bank ("CMB") HK 3968,
SH A 600036 AA- Stable
Shanghai Pudong
Development
Bank("SPDB") SH A 600000 A+ Stable
China Minsheng
Bank Corporation
("CMBC") SH A 600016 A- Stable
Hua Xia Bank
("HXB") SH A 600015 BBB Stable
Shenzhen
Development
Bank ("SDB") SZ A 000001 BBB Stable
The ratings reflect Xinhua Far East’s positive view on Chinese listed joint-stock commercial banks in what is a buoyant economy and a market characterized by growing levels of deposits. The ratings also incorporate concerns, however, about intensifying competition faced by national joint-stock commercial banks, which continue to rely heavily on interest income and have somewhat immature risk management systems. The ratings also consider the banks’ varying corporate governance and information disclosure standards, as well as their differing abilities to weather economic cycles and obtain shareholder support in times of financial difficulty.
Despite structural imbalances and risks within the economy, we expect the Chinese banking industry’s growth to maintain its momentum, with the eco-political situation remaining stable and depositor confidence in the banking system remaining strong. These are the key factors supporting the long-term ratings of Chinese banks. The industry should continue growing rapidly, although the growth rate could be moderated by government macro-economic control policies, the trend towards disintermediation (withdrawal of funds from banks to flow directly to users) and the regulatory capitals limitations.
On the other hand, national joint-stock commercial banks face intensifying competition, with reforms of state banks accelerating and more foreign players entering the market. Although it takes time for the efficiencies, service standards and credit cultures in state-owned banks to be improved, and most foreign players will be more likely to focus on niche commercial banking and private banking due to disadvantages in franchises, joint-stock commercial banks still need to formulate clear strategies and sharpen their execution abilities to win in the market.
Xinhua Far East is also concerned that the credit risks, interest rate risks and certain hidden risks still face Chinese banks, in view of their immature risk management systems and a heavy reliance on interest income. With certain sectors in the economy experiencing over-supply and profit squeezes, credit risks could be mounting, especially as a strong credit culture has yet to be firmly established in Chinese banks. Interest rate hikes could also affect the performance of many sectors, thereby compounding the credit risks faced by Chinese banks. They could also put downward pressure on the growth rates of loans and the prices of securities in which the banks invest. Hidden risks could also be significant among those banks lacking strict internal control systems, as is evidenced by the practice of some banks lending to problematic borrowers through third parties, with some risks also hidden in off-balance sheet arrangements (e.g. entrusted loans/ investments, guarantees, acceptance). However, the risks should have no significant impact in the short run due to the overall booming economy.
Xinhua Far East also recognizes the importance of banks’ governance and transparency in boosting investor confidence and supporting bank credit profiles. Despite significant progress in recent years, Chinese listed banks, especially purely A-share listed banks, need to further improve their disclosure of non-financial information, including strategy, market prospects, market position, and internal controls, as well as financial information in segment reporting, risk disclosure, off-balance sheet items and migration of NPLs.
In summary, we believe domestic banks need further internal reforms in respect to product structure, risk management and corporate governance to be competitive in the long term. Those with more diverse income streams, better risk management practices, greater information disclosure and transparency and stronger government or shareholder support will have a greater ability to withstand risks and therefore maintain better credit profiles.
BoComm: The AA rating for BoComm reflects the strong support that it is expected to receive from the government as a result of its being majority-owned by government entities. Its capital status, product development, corporate governance and risk management systems are improving as well, especially after its IPO and with HSBC’s participation as a strategic partner. However, Xinhua Far East believes that its loan portfolio is still skewed too far towards the manufacturing sector, and that its special mention loan ratio is relatively high and NPL coverage ratio relatively low.
CMB: the AA- rating for CMB reflects its leading market position for retail banking, its fast-growing non-interest income stream and its relatively strong prudent risk management system. Both its debit and credit cards lines have strong market recognition and strong consumer uptake. The high percentage of its retail client base, relative to other joint-stock commercial banks, helps it attract ample deposits, enjoy lower financing costs and achieve rapidly rising non-interest income. Its risk management system is relatively better as well, as evidenced by its prudence in provisioning and comparatively low exposure to the manufacturing and real estate sectors.
SPDB: the A+ rating for SPDB reflects the bank’s strength in corporate banking and its strong shareholder support. SPDB’s strength in corporate banking and its regional focus on the Yangtze River Delta region enables it to leverage this fast growing market, but also increases its business concentration risks. SPDB’s NPL ratio has been improving over the years, with its NPL coverage ratio the highest among Chinese banks. Its loan portfolio is skewed towards the manufacturing and real estate sectors, however, and it has some geographical risks. As a bank majority-controlled by companies owned by the Shanghai government, it is nevertheless in a favorable position to obtain government support in the event of financial difficulty.
CMBC: the A- rating for CMBC reflects its position as the fastest growing listed national commercial bank in China - the result of its innovative culture and incentive schemes. However, Xinhua Far East is concerned about the bank’s aggressive growth strategy and mounting risks in its relatively concentrated loan portfolio, despite having the lowest NPL ratio. We also note CMBC’s continual financing needs due to more stringent capital requirements and the limited financial capacity of its current major shareholders. It also has liquidity risk challenges as most of its deposits come from corporate clients.
HXB: the BBB rating for HXB reflects Xinhua Far East’s belief that HXB will grow to be a more commercially-oriented bank, rectify its historical weakness in corporate governance and information disclosure, and make progress in risk management in the current favorable market environment and with the introduction of foreign investors. However, its relatively weak market position in the increasingly competitive market, its dependence on corporate deposits, its continuous financing needs, its loan portfolio concentration, low coverage ratio and weak profit generating ability prevent it from obtaining a higher rating at this time.
SDB: The long-term BBB rating for Shenzhen Development Bank (SDB) is primarily based on the fact that its financial position and risk management is improving following the introduction of Newbridge as its leading shareholder. It is also based on the expectation that it will enhance its market position by adopting a more focused strategy on working capital and trade financing loans. However, its low capital adequacy ratio limits its further expansion and poses risks to depositors, which has limited its potential to be enhanced in the short run due to its stagnancy in non-tradable shares reform. Further, its relatively weak market position in the increasingly competitive market, its legacy asset quality problems, its loan portfolio concentration, low coverage ratio and high loan-to-deposit ratio prevent it from getting a higher rating.
For the full rating report, please contact us via xfe@xinhuafinance.com .
Note to Editors:
About Xinhua Far East China Ratings
Xinhua Far East China Ratings (Xinhua Far East) is a pioneering venture in China that aims to rank credit risks among corporations in China. It is a strategic alliance between Xinhua Finance (TSE Mothers: 9399), and Shanghai Far East Credit Rating Co., Ltd. Shanghai Far East became a Xinhua Finance partner company in 2003 and the first China member of The Association of Credit Rating Agencies in Asia in December 2003.
Capitalizing on the synergy between Xinhua Finance and Shanghai Far East, Xinhua Far East’s rating methodology and process blend unique local market knowledge with international rating standards. Xinhua Far East is committed to provide investors with independent, objective, timely and forward-looking credit opinions on Chinese companies. It aims to help investors differentiate the credit risks among the corporations in China, thereby, cultivating their awareness and promoting information disclosures and transparency in China market.
For more information, see http://www.xfn.com/creditrating .
About Xinhua Finance Limited
Xinhua Finance Limited is China’s unchallenged leader in financial information and media, and is listed on the Mothers board of the Tokyo Stock Exchange (symbol: 9399) (OTC ADRs: XHFNY). Bridging China’s financial markets and the world, Xinhua Finance serves financial institutions, corporations and re-distributors through four focused and complementary service lines: Indices, Ratings, Financial News and Investor Relations. Founded in November 1999, the Company is headquartered in Shanghai with 20 news bureaus and offices in 19 locations across Asia, Australia, North America and Europe.
For more information, please visit http://www.xinhuafinance.com .
About Shanghai Far East Credit Rating Co., Ltd
Shanghai Far East Credit Rating Co., Ltd. is the first and leading professional credit rating company with comprehensive business coverage in China. It is an independent agency established by the Shanghai Academy of Social Sciences with the mission to develop internationally accepted standards for capital market in China. The company is a pioneer in conducting bond-rating business in China. For years, it has been authorized by the Shanghai branch of the PBOC to undertake loan certificate credit rating.
Since establishment, it has rated over 1,000 corporate long-term bonds and commercial papers, based on the principles of objectivity, fairness and independence. The company has also maintained over 50% market share in the loan certificate-rating sector in Shanghai for three consecutive years. With its strong local presence and knowledge, it provides investors with unique and the most insightful credit opinion.
For more information, see http://www.fareast-cr.com .
