CHINA GALAXY SECURITIES CO., LTD.
Fitch Ratings has affirmed the Long-Term Issuer Default Ratings (IDRs) and Shareholder Support Ratings (SSRs) of
The Outlook is Stable.
Fitch has also affirmed the Long-Term IDRs and SSRs of CGS's two
CGS is a
CGI is a wholly owned subsidiary of CGS and serves as the core offshore integrated platform for the group's international business. CGSI is a
Key Rating Drivers
Support-Driven Rating: CGS's IDR is underpinned by our view that extraordinary support would be forthcoming from its actual controller, Central Huijin, in the event of stress. The support-driven rating also reflects CGS's strategic role in supporting financial system stability and the government's objectives of overseas expansion. Furthermore, the legal obligation for major shareholders to provide capital support is stated in CGS's articles of association, as required by the
We believe support is strengthened by Central Huijin's controlling ownership, strong board oversight of CGS and the reputational implications for the shareholder if CGS were to default. We expect Central Huijin to remain as CGS's largest shareholder, given its role in facilitating the development of
Stable SROE: The sector risk operating environment (SROE) score remains at 'bbb-'/ Stable, supported by a strengthening regulatory framework that enhances long-term capital market growth. This is in spite of potential business volatility from evolving capital market development and economic headwinds. The score is above the implied 'bb' category score, as we believe
Near-Term Capital Market Challenges: Although equity market turnover has stabilised, regulatory tightening to improve the quality of listed companies and restrictions on local-government refinancing have disrupted investment banking operations. This has discouraged IPO deals and pressured debt issuance activities. However, we expect these measures to yield long-term benefits by reducing credit risk from lower-quality issuers and enhancing regulatory oversight through improved data transparency and disclosure. This should contribute to the financial system's overall stability.
Important Credit Intermediary Role: CGS, as one of
Earnings Under Pressure: We expect tighter regulations on listing requirements and local government leverage to pressure CGS's investment-banking operations and overall returns into 2024. CGS's profitability, measured by operating income/average equity, declined to 7.1% in 2023 and 5.4% in 1Q24, from 7.9% in 2022. Although proprietary trading income recovered from distressed conditions in 2022, 2023 profit was pressured by lower brokerage income amid weak capital market sentiment.
Healthy Capital Position: CGS has consistently maintained adequate leverage relative to the business risks it undertakes, retaining an adequate capital buffer against unexpected market shocks. Its net adjusted tangible leverage has stayed in the range of 4.0x-4.7x over 2020-1Q24.
Reliance on Wholesale Funding: CGS relies on wholesale funding, especially repos for short-term funding, similar to peers. Nonetheless, the risk is mitigated by its sufficient liquidity coverage buffers and adequate underlying collateral against repos, which have suitable credit quality. The company's funding and liquidity profile also reflects the contingency funding plan in place and the potential for ordinary support from its parent, Central Huijin.
Hong Kong-Based Subsidiary Rating: We equalise the ratings of CGI and CGS, reflecting our assessment of an extremely high propensity of support from CGS. CGI is CGS's core overseas integrated platform, responsible of managing all of its offshore business. This is one of CGS's five key business segments and is aligned with Central Huijin's strategy to internationalise
Singapore-Based Subsidiaries' Ratings: CGSI's rating reflects our belief that the probability of extraordinary support via CGS from CGS's ultimate shareholder, the Chinese sovereign (A+/Negative), is high. The support-driven rating also reflects the increase in CGSI's strategic linkage with its parent, although business synergies remain low, CGS fully controlling CGSI's board and management, and CGSI being highly integrated with CGS's daily operations. We also believe CGS would face high reputational damage if its fully owned overseas subsidiary was allowed to default.
The rating on CGSI SGP is equalised with that of CGSI, as the wholly owned subsidiary is CGSI's core and exclusive platform in
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
IDRs - CGS and CGI
The IDR would most likely be downgraded if
A downgrade would also be triggered by a significant weakening in CGS's role in facilitating the development and stability of
CGI could be downgraded if CGS shows signs of a reduced propensity and ability to support the subsidiary.
IDRs - CGSI and CGSI SGP
A downgrade of CGS's IDR would lead to a downgrade of the IDRs of CGSI and CGSI SGP to the same magnitude.
A downgrade of CGSI's IDR could also be triggered by changes in the propensity of CGS to provide extraordinary support, such as weakening linkage due to a large dilution of CGS's shareholding stake, or a significant reduction of CGSI's degree of integration with CGS and its role in facilitating CGS's offshore expansion, particularly in the south-east Asian market. Prolonged financial underperformance by CGSI against the parent's targets could also reduce its strategic relevance to the parent and may result in negative rating action.
A downgrade of CGSI's IDR could lead to a downgrade of CGSI SGP's IDR. Negative rating action could also be possible if we no longer view CGSI SGP as a core subsidiary for CGSI.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
IDRs - CGS and CGI
An upgrade of the sovereign rating or an improvement of our internal assessment of Central Huijin's credit profile could lead to positive rating action on CGS's IDR, if that were to indicate a greater ability to support CGS with no less propensity to provide support.
CGS's rating could also be upgraded if we believe that it has become more systemically important to the Chinese government, although this appears less probable against the importance of large state-owned banks, or if the entity undertakes a more significant policy role.
An upgrade of CGI would follow similar rating action on CGS.
IDRs - CGSI and CGSI SGP
An upgrade of CGS's IDR would lead to an upgrade of CGSI and CGSI SGP to the same magnitude.
Positive rating action for CGSI would also be likely if we believe that CGSI has significantly increased its strategic importance, as evidenced by a notable improvement in business synergies with CGS.
An upgrade for CGSI SGP appears unlikely, as its IDR is already equalised with CGSI's IDR. An upgrade would follow positive rating action on CGSI.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Public Ratings with Credit Linkage to other ratings
The ratings of CGI, CGSI and CGSI SGP are directly linked to CGS's rating.
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
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