Fitch Ratings has upgraded
At the same time, Fitch has affirmed CMBC's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'BB+', Short-Term IDR at 'B' and Government Support Rating (GSR) at 'bb+'. The Outlook on the Long-Term IDR is Stable. The assigned VR is in line with the implied VR, but does not drive the IDRs.
The upgrade of CMBC's VR is driven by our assessment that, like other similarly sized banks in
Key Rating Drivers
Government Support-Driven IDR: CMBC's Long-Term IDR is driven by our assessment of a 'Moderate' likelihood of government support in the event of stress. This takes into consideration the bank's limited market share nationally, especially in terms of retail deposits, lack of parental support, as well as limited regional significance and government linkages. That said, CMBC is one of the largest among the mid-tier banks rated by Fitch. CMBC's 'B' Short-Term IDR is mapped to its Long-Term IDR.
D-SIB Status Differentiated from Larger Banks: The Chinese authorities designated CMBC as a domestic systemically important bank (D-SIB) in 2021. However, we do not believe the designation alone will influence the
No Explicit Shareholder Support: We do not factor in shareholder support from state-owned
Stable OE: We expect
Modest Improvement in Retail Franchise: The revision of CMBC's business profile score to 'bb+', from 'bb', reflects its improving retail franchise, one of the bank's areas of focus in recent years. However, the score remains below the 'a' implied category score due to our views on management and governance limitations as well as the bank's exposure to shadow-banking and non-loan activities - similar to most Chinese banks rated by Fitch.
Management and governance limitations are not uncommon in
Reducing Shadow-Banking Activities: The revision of CMBC's risk profile score to 'b+', from 'b', takes into consideration the reduction in its shadow-banking activities amid tightening regulations over the past five years. Its entrusted investments declined to 7% of assets by end-2022, from 10% at end-2018, while its off-balance-sheet wealth management products (WMPs) fell to around 22% of deposits and 12% of assets, from 27% and 14%, respectively, over the same period.
Continuous NPL resolution: The revision of CMBC's asset quality score to 'b+', from 'b', considers its non-performing loan (NPL) resolution in recent years, which should reduce the negative impact from economic volatility and property weakness on its asset quality. The asset quality score remains below the 'bbb' category implied score to reflect its large non-loan and riskier loan exposures and our perception of its weaker underwriting standards relative to state banks and large mid-tier banks.
Modest Improvement in Underlying Profitability: The revision of CMBC's earnings and profitability score to 'b', from 'b-', considers the improvement in its underlying profitability as shrinking shadow-banking activity lowers the risk of delayed asset impairment and potential understatement of risk-weighted assets (RWA).
The revision also reflects our view that its underlying earnings will be less volatile due to risk reduction efforts over the past few years. However, its earnings and profitability score is below the 'bb' category implied score to reflect its higher non-loan exposures relative to state banks and large mid-tier banks.
Limited Capital Buffers: CMBC's common equity Tier 1 (CET1) ratio remained modest at 9.0% by end-1Q23. We expect the bank's CET1 ratio to remain lower than that of higher-rated banks due to its more modest profitability. As such, its capitalisation and leverage score of 'b' is unchanged, and below the 'bb' category implied score to also reflect its high non-loan exposure relative to state banks and large mid-tier banks, which is not adequately captured in the RWA calculations.
Modest improvement in Funding Profile: The revision of CMBC's funding and liquidity score to 'b+', from 'b', reflects the increasing share of retail deposits in total deposit funding. However, the score is below the 'bbb' category implied score because of the bank's higher reliance on non-deposit funding (similar to most other Chinese banks) and modest retail deposit franchise relative to higher-rated peers.
Rating Sensitivities
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
The Long-Term IDR and GSR will come under pressure if we perceive that the central government's propensity or ability to provide timely extraordinary support has diminished. This could be implied by a sovereign rating downgrade or a lower support propensity, as reflected in an enhanced resolution framework (and strong intention by the authorities to permit losses on senior debt obligations as a means of resolving banks), although we do not expect either scenario to occur in the near term.
The Short-Term IDR will not be downgraded unless the Long-Term IDR is downgraded to or below 'CCC+', which we view as highly unlikely in the short to medium term.
The VR could be downgraded if the OE score is downgraded or if we assess the bank to have materially increased its risk appetite, especially in micro and small enterprise loans and credit-card receivables, or if it aggressively increases its exposure to entrusted investments or WMPs and erodes its modest capital buffer. A sustained deterioration in financial metrics could also lead to a VR downgrade, including a combination of the following reported core metrics without having addressed a large part of the perceived risks around transparency of exposures, including off-balance sheet and non-loan:
the four-year average impaired loan/gross loan ratio increasing to and remaining at around 8% (2019-2022 average: 1.8%), although our assessment of asset quality will also consider other indicators, such as 'special-mention' loans, loan loss provisioning, and whether (and to what extent) we believe reported metrics understate any deterioration in asset quality; and
the CET1 ratio falling below 8% without a credible path to return to existing levels
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
An upgrade of
The Short-Term IDR will be upgraded if the Long-Term IDR is upgraded.
An improvement in CMBC's capitalisation, such that its CET1 ratio will be sustained around 10%, in conjunction with a further reduction in risk appetite and greater transparency in its financial statements- particularly around risks relating to shadow-banking activity (e.g. our assessment of asset quality metrics) - would be positive for its VR assessment.
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
CMBC's IDRs (xgs) are driven by its VR. The Long-Term IDR (xgs) has been upgraded to 'B+(xgs)', from 'B(xgs)', following the upgrade of the VR, while the Short-Term IDR (xgs) has been affirmed at 'B(xgs)'.
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
The bank's Long-Term IDR (xgs) could be downgraded if the VR is downgraded. The bank's Short-Term IDR (xgs) could be downgraded if the VR is downgraded below 'b-'.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
The bank's Long-Term IDR (xgs) could be upgraded if the VR is upgraded. The bank's Short-Term IDR (xgs) could be upgraded if the VR is upgraded above 'bb+'.
VR ADJUSTMENTS
The OE score of 'bbb-' has been assigned above the 'bb' category implied score for the following adjustment reason: sovereign rating (positive).
The business profile score of 'bb+' has been assigned below the 'a' category implied score for the following adjustment reasons: management and governance (negative) and business model (negative).
The asset quality score of 'b+' has been assigned below the 'bbb' category implied score for the following adjustment reasons: non-loan exposure (negative) and underwriting standard and growth (negative).
The earnings and profitability score of 'b' has been assigned below the 'bb' category implied score for the following adjustment reason: risk-weight calculation (negative).
The capitalisation and leverage score of 'b' has been assigned below the 'bb' category implied score for the following adjustment reason: leverage and risk-weight calculation (negative).
The funding and liquidity score of 'b+' has been assigned below the 'bbb' category implied score for the following adjustment reasons: non-deposit funding (negative) and deposit structure (negative).
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
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
CMBC's IDRs are directly linked to
ESG Considerations
CMBC has an ESG Relevance Score of '4' for Financial Transparency due to structural issues around financial transparency and disclosure. These are not captured in headline performance metrics in
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This 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. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
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