Credit Rating: M/P
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Fundamental View
AS OF 24 Apr 2024We are comfortable with Reliance’s large diversified scale of operations and dominant presence in various key sectors (refining, petrochemicals, retail and telecom), which allows for earnings resilience.
We believe a lackluster oils-to-chemicals outlook is well mitigated by strong outlooks for telecom, retail, and upstream oil & gas.
Plans to ramp up its renewable energy business could provide the next leg of growth and improve ESG perception.
Reliance incurs significant capex that has weighed on free cash flow generation, though we acknowledge its historically prudent financial management and robust credit metrics that provide ample elbowroom for some credit profile deterioration.
Business Description
AS OF 24 Apr 2024- RIL is an Indian diversified conglomerate engaged in oil & gas refining, marketing, petrochemicals, organized retail, telecom and digital services, amongst others. It is the largest company in India by revenue, profits, exports and market capitalization (INR 20 tn).
- It is the second largest refiner in India and produces petroleum products such as petrol, high-speed diesel (HSD), aviation turbine fuel (ATF), LPG and lubricants.
- It is the largest petrochemicals producer in India, boasting production of ~38 mn tons in FY20. Through its integrated Jamnagar refinery complex, it produces Polymers/Plastics, Elastomers (synthetic rubber) and Polyester products.
- It is the largest retailer in India in terms of revenue. It operates 18.8k stores (as of March 2024) to sell products ranging from consumer electronics, fashion and lifestyle, grocery, petrol retail and telecom and digital services. It launched its online retail channel, 'JioMart', in December 2019.
- Reliance Jio is the largest mobile telecom operator by subscriber base (482 mn as of March 2024) in India and boasts the widest 4G wireless network in the country.
- In 2021, RIL announced investments to the tune of INR 750 bn/ $10 bn (for next 3 years) to build a renewable energy ecosystem which will include 4 giga factories. Set to be located in Gujarat, the factories will produce solar modules, hydrogen, fuel cells and battery grid to store electricity. Long-term goals also include building 100 GW of PV solar plants by 2030.
Risk & Catalysts
AS OF 24 Apr 2024Reliance’s O2C (oil-to chemicals) margins remain under pressure from high crude oil input costs, amid global growth slowdown concerns.
Reliance incurs significant capex at historically high levels, particularly from continued investments into its O2C, retail, and nascent renewables businesses, upfront payment on telecom spectrum and acquisition of Disney India. This has weighed on its free cash flow generation, though we take comfort in Reliance’s historically prudent financial management and robust credit metrics.
Reliance faces key-person risk; 65-year old Chairman Mukesh Ambani has begun to hand over the reins of the company’s different business divisions to his children.
Key Metrics
AS OF 24 Apr 2024INR bn | FY20 | FY21 | FY22 | FY23 | FY24 |
---|---|---|---|---|---|
Debt to Book Cap | 43.0% | 24.6% | 24.1% | 28.7% | 27.2% |
Net Debt to Book Cap | 39.2% | 22.9% | 21.0% | 22.8% | 19.6% |
Debt/Total Equity | 75.5% | 32.5% | 31.7% | 40.3% | 37.4% |
Debt/Total Assets | 29.9% | 19.7% | 18.8% | 20.8% | 19.7% |
Gross Leverage | 3.9x | 3.2x | 2.6x | 2.3x | 2.1x |
Net Leverage | 3.5x | 3.0x | 2.2x | 1.9x | 1.5x |
Interest Coverage | 3.2x | 3.1x | 5.7x | 5.0x | 7.0x |
EBITDA Margin | 14.7% | 16.6% | 15.3% | 16.0% | 17.7% |
CreditSights View
AS OF 24 Apr 2024We have a Market perform recommendation on Reliance (RIL). RIL’s bonds trade fairly to closely rated Indian peers Bharti Airtel and BPCL. We like RIL’s large diversified operations and dominant market shares in key sectors (refining, retail and telecom) that allow for earnings resilience. Its growing renewable business could aid ESG investor sentiment too. While we remain aware of RIL’s elevated capex needs could persist over the next 3-5 years, we think the impact is mitigated by RIL’s prudent financial management and healthy credit metrics that provide ample elbowroom for some credit profile deterioration. While key man risk remains a concern, we take comfort in gradually progressing succession plans.
Recommendation Reviewed: April 24, 2024
Recommendation Changed: June 30, 2021
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Fundamental View
AS OF 09 Apr 2024We expect Petron’s credit metrics to worsen modestly in FY24 as modestly higher crude oil input costs and higher capex could outweigh resilient fuel demand aided by Petron’s dominant market share in 2 markets.
About two-third of its total revenues are derived from the Philippines and are indexed to Dubai crude prices, which allows for smooth cost pass-throughs and good insulation from crude price volatility.
Free cash flows are typically negative due to inventory fluctuations that outweigh low capex.
Business Description
AS OF 09 Apr 2024- Petron is the largest oil refining and retailing company in the Philippines, and the third largest player in Malaysia. It maintains a 24% market share in the Philippines (followed by Shell and Caltex) and a 20% market share in Malaysia (largest being Petronas), based on total fuel sales volumes.
- Petron has a total refining capacity of 268k barrels/day (bpd) and accounts for about 30% of the Philippines' fuel needs. Its petroleum refining facilities include the Limay Refinery in Bataan, Philippines (capacity of 180k bpd; 67% of total) and the Port Dickson Refinery in Negeri Sembilan, Malaysia (capacity of 88k bpd; remaining 33% of total).
- Petron's refineries process crude oil into a full range of petroleum products including gasoline, diesel, LPG, jet fuel, kerosene and petrochemicals.
- It further markets and retails these fuel products through its fuel service stations located across the Philippines (2,400 outlets) and Malaysia (700 outlets).
- Petron sources its crude oil supplies from third-party suppliers, namely Saudi Aramco, Kuwait Petroleum Corporation and Exxon Mobil, which are bought on the basis of term contracts and in the spot market.
- Petron mainly supplies its petroleum and fuel products to customers in Malaysia and the Philippines (~95% of annual revenue).
- Petron is 68% owned by San Miguel Corporation (SMC), one of the largest and most diversified conglomerates in the Philippines based on total revenues and assets. SMC's CEO, Mr. Ramon Ang, is also Petron's CEO.
Risk & Catalysts
AS OF 09 Apr 2024Prices of fuel products are adjusted on a weekly basis in the Philippines, according to international crude oil prices.
Petron operates in low-margin business (EBITDA margins ~5%) and maintains elevated credit metrics.
Petron is highly dependent on its Limay petroleum refining complex that makes up two-thirds of its total refining capacity (67%). Any events that disrupt the refinery’s operations could adversely affect Petron’s total revenues.
Key Metrics
AS OF 09 Apr 2024PHP bn | FY19 | FY20 | FY21 | FY22 | FY23 |
---|---|---|---|---|---|
Debt to Book Cap | 72.6% | 74.3% | 72.3% | 74.0% | 75.1% |
Net Debt to Book Cap | 62.5% | 66.3% | 63.3% | 65.5% | 68.2% |
Debt/Total Equity | 265.2% | 289.4% | 261.6% | 284.2% | 301.4% |
Debt/Total Assets | 62.1% | 71.3% | 71.2% | 70.2% | 67.6% |
Gross Leverage | 8.8x | 65.4x | 11.2x | 10.9x | 7.1x |
Net Leverage | 7.5x | 58.3x | 9.8x | 9.7x | 6.5x |
Interest Coverage | 2.1x | 0.3x | 2.5x | 2.2x | 2.2x |
EBITDA Margin | 5.4% | 1.3% | 5.9% | 3.4% | 5.3% |
CreditSights View
AS OF 09 Apr 2024We maintain our Market perform recommendation on Petron. Petron’s c.Apr-2026 perp trades 42 bp wider than SMC c.Jul-2025 perp. We think Petron should trade tighter given its Opco structure vs. SMC’s Holdco, its cost pass-through mechanisms, and low capex which more than offset SMC’s larger diversified businesses. Overall, we continue to take comfort in Petron’s resilient credit profile, supported by a good cost-passthrough contractual mix that provides good insulation from crude price volatility. While we expect credit metrics to worsen modestly in FY24 from poorer EBITDA and higher capex, we expect the impact to be mitigated by robust domestic demand and further ~PHP 15 bn of preference share issuances.
Recommendation Reviewed: April 09, 2024
Recommendation Changed: January 26, 2022
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Reliance Industries
JD.com
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Fundamental View
AS OF 22 Dec 2023Our credit view on China Construction Bank (CCB; ratings: A1/A/A) is based on a strong likelihood of state support in the event of distress, given its large size, systemic importance and majority government ownership.
Its systemic importance is enhanced by the key role it plays in financing China’s economic development and its close government links (and large government shareholding).
The Big 4 banks are generally more prudently managed than their more aggressive smaller competitors, but they are also expected to support the real economy in a downturn.
Business Description
AS OF 22 Dec 2023- CCB is one of the Big 4 Chinese banks and is classified as a G-SIB requiring an additional capital surcharge of 1.5%.
- CCB was originally formed in 1954 as a subsidiary of China's MOF to disburse funds intended for fixed asset investment. In the early 1980s, it started taking deposits and making loans outside of direct MOF control. In 1998, its NPLs were transferred to Cinda AMC in exchange for RMB 247 bn of Cinda bonds.
- The bank was re-capitalised again in 2003 with an injection of $23 bn by the PBOC. It was listed in 2005 but the Chinese government remains its controlling shareholder with a 57% stake held through state-owned Central Huijin.
- The bank owns CCB Asia and CCB International in Hong Kong as well as operations in a number of countries.
Risk & Catalysts
AS OF 22 Dec 2023China’s sovereign ratings (A1/A+/A+) underpin CCB’s credit standing; any deterioration in the sovereign ratings will negatively affect CCB’s ratings.
CCB’s loan growth has been rapid to support the post-COVID economy, but this has also led to increasing pressure on its capital ratios. As a G-SIB, CCB has a substantial TLAC shortfall to meet by 1 January 2025, but we have not seen TLAC senior non-preferred issuance commence as yet.
CCB may be asked by the government to perform “national service” that overrides profitability considerations, e.g. supporting troubled property developers and extending loans at lower rates during the pandemic. We would not regard such actions as credit-negative as they reflect close government links that also underpin the bank’s credit standing.
Key Metrics
AS OF 22 Dec 2023RMB bn | FY19 | FY20 | FY21 | FY22 | 9M23 |
---|---|---|---|---|---|
PPOP ROA | 2.01% | 1.96% | 1.87% | 1.65% | 1.56% |
Reported ROA | 1.11% | 1.02% | 1.04% | 1.00% | 0.94% |
Reported ROE | 13.2% | 12.1% | 12.6% | 12.3% | 12.1% |
Equity/Assets | 8.7% | 8.4% | 8.6% | 8.3% | 8.1% |
CET1 Ratio | 13.9% | 13.6% | 13.6% | 13.7% | 12.9% |
NPL Ratio | 1.42% | 1.56% | 1.42% | 1.38% | 1.37% |
Provisions/Average Loans | 1.14% | 1.19% | 0.95% | 0.77% | 0.74% |
Loan-Deposit Ratio | 82% | 81% | 84% | 85% | 85% |
CreditSights View
AS OF 01 Apr 2024CCB is the 2nd-largest of the Chinese state-owned commercial banks and benefits from a strong franchise and close state links. It has the second strongest capital ratios among Chinese banks, just behind ICBC. Its profitability has recently been impacted by its social duties to support the real economy including stepping up lending at lower rates, but we do not regard such actions as credit-negative as they reflect the close government links that also underpin the bank’s credit standing. Profit growth was weak in FY23 with lower core topline revenues, and will continue to be challenging in FY24. Due to China’s weaker macro outlook, challenging prospects for the sector, and tighter spreads compared to elsewhere in Asia, we have an Underperform recommendation on the bank.
Recommendation Reviewed: April 01, 2024
Recommendation Changed: August 22, 2023
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Fundamental View
AS OF 22 Dec 2023The Bank of China (BCHINA; ratings: A1/A/A) is one of the Big 4 banks in China. Its subsidiary, BOC Hong Kong, is one of the major banks in HK.
BCHINA’s systemic importance is enhanced by the leading role it plays in China’s international trade and investment and strong government links.
BCHINA’s capital standing and reserve cover are a little weaker than ICBCAS and CCB, but the Big 4 banks have generally been managed more prudently compared to the smaller and more aggressive joint stock banks.
Business Description
AS OF 22 Dec 2023- While its origins date back to China's last imperial dynasty, BCHINA was formally established in 1912 and has played the role of China's international bank for more than a century. Its operations outside mainland China include its 66%-owned subsidiary Bank of China (HK).
- After 1949, BCHINA became a state entity but was focused on FX and financing of foreign trade. It was set on a path of commercialisation in 1994 but only became a corporate entity in 2003 prior to its listings in HK and Shanghai in 2006. BCHINA is controlled by the government via a 64% stake held by Central Huijin.
- BCHINA was effectively insolvent in the late 1990s and the removal of NPLs to an AMC in 1999 did not fully deal with its legacy bad loans. In 2003, the bank received another $22.5 bn capital injection, paving the way for BOC's HK listing in 2006.
- BCHINA is a G-SIB with a capital surcharge of 1.5%. BOCHK is a D-SIB in HK and is the holding company for all of BCHINA's Southeast Asian operations excluding Singapore.
Risk & Catalysts
AS OF 22 Dec 2023China’s sovereign ratings (A1/A+/A+) are a key factor behind BCHINA’s credit standing.
BCHINA is managed on commercial terms, but fulfilling the government’s socioeconomic objectives may at times override profitability considerations and require the bank to perform “national service”. We would not regard such actions as credit-negative as they reflect close government links that also underpin the bank’s credit standing.
BCHINA’s overseas footprint has to some extent offset the onshore NIM pressure and led to a stabler NIM compared to peers in FY22. However, as overseas funding costs go up, its NIM will also be under pressure in FY23.
As a G-SIB, BCHINA has a substantial TLAC shortfall to meet (we estimate RMB 539 bn by Jan-25 and RMB 1,183 bn by Jan-28), but we have not seen TLAC senior non-preferred issuance commence as yet.
Key Metrics
AS OF 22 Dec 2023RMB bn | FY19 | FY20 | FY21 | FY22 | 9M23 |
---|---|---|---|---|---|
PPP ROA | 1.60% | 1.55% | 1.48% | 1.40% | 1.38% |
Credit Costs | 0.82% | 0.87% | 0.70% | 0.63% | 0.65% |
Reported ROA | 0.92% | 0.87% | 0.89% | 0.85% | 0.82% |
Reported ROE | 11.5% | 10.6% | 11.3% | 10.8% | 10.4% |
Total Equity/Total Assets | 8.1% | 8.4% | 8.3% | 8.4% | 8.5% |
CET1 Ratio | 11.3% | 11.3% | 11.3% | 11.8% | 11.4% |
NPL Ratio | 1.36% | 1.46% | 1.33% | 1.32% | 1.27% |
Loan-Deposit Ratio | 83% | 84% | 87% | 87% | 87% |
CreditSights View
AS OF 01 Apr 2024BCHINA is one of the Big 4 banks (the 4th-largest by assets) with a reasonable capital stack and sufficient liquidity. Its majority government ownership and systemic importance also assures it of strong state support. Its NIM and profitability has trailed its more domestically-focused peers due to higher cost-income ratios of its overseas operations, but its credit costs are also the lowest among the Big 5 banks. Its overseas footprint has to some extent offset the onshore NIM pressure and led to a more stable NIM compared to peers in FY23. However, as overseas funding costs go up, its NIM advantage has waned. Due to China’s weaker macro outlook, challenging prospects for the sector, and tighter spreads compared to elsewhere in Asia, we have an Underperform recommendation on the bank.
Recommendation Reviewed: April 01, 2024
Recommendation Changed: August 22, 2023
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BDO Unibank
Reliance Industries
JD.com
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Fundamental View
AS OF 22 Dec 2023Our credit view on AGRBK (credit ratings: A1/A/A) is based on a strong likelihood of state support, given its large size, systemic importance and majority state ownership. This is enhanced by AGRBK’s extensive presence in rural areas.
AGRBK’s capital standing is weaker than those of peer-group leaders ICBCAS and CCB and in line with BCHINA; however it has peer-leading reserve coverage ratio. The Big 4 have been managed more prudently in recent years than the smaller and more aggressive joint stock banks.
We view it as a strong credit taking into account its structural profitability, robust balance sheet metrics, large size, and systemic importance that assure it of state support if needed.
Business Description
AS OF 22 Dec 2023- AGRBK has surpassed CCB to become the second-largest bank in China in terms of total assets and has been moved from bucket 1 to bucket 2 in the G-SIB list with a capital surcharge of 1.5%.
- It was founded in 1951 as the Agricultural Cooperative Bank, merged with the central bank and spun out as AGRBK in 1979, charged with financing the rural and agricultural sectors. It was recapitalised in 1999 and again in 2007 by special MOF bonds. It also received $19 bn in equity capital from Huijin, funded by China's FX reserves.
- Due to its poorer asset quality and weaker profitability, AGRBK was the last of the Big 4 banks to be listed in 2010.
- The Chinese government is a majority shareholder of AGRBK via Central Huijin (40%), MOF (35%) and the Social Security Fund (7%).
- AGRBK has the second largest branch network in China after Postal Bank, with a particularly good presence in rural areas.
Risk & Catalysts
AS OF 22 Dec 2023China’s sovereign ratings (A1/A+/A+) are a key factor behind AGRBK’s credit standing.
AGRBK’s loan growth has been the strongest among the Big 5 banks since FY22, but the impact on net interest income growth was largely offset by a significant contraction in NIM. Rapid loan growth has led to a widened capital ratio differential between AGRBK and other Big 4 banks. It has the largest TLAC shortfall among the Chinese G-SIBs (we estimate RMB 816 bn by Jan-25 and RMB 1,636 bn by Jan-28), but we have not seen TLAC senior non-preferred issuance commence as yet.
AGRBK is managed on commercial terms but the government may call on it to perform “national service” that overrides profitability considerations. However, we do not see it as a clear credit negative as these actions reflect close state links that underpin ABC’s credit standing.
Key Metrics
AS OF 22 Dec 2023RMB bn | FY19 | FY20 | FY21 | FY22 | 9M23 |
---|---|---|---|---|---|
PPP ROA | 1.71% | 1.65% | 1.64% | 1.43% | 1.35% |
Reported ROA | 0.90% | 0.83% | 0.86% | 0.82% | 0.76% |
Reported ROE | 12.4% | 11.4% | 11.6% | 11.3% | 11.4% |
Total Equity/Total Assets | 7.8% | 8.1% | 8.3% | 7.9% | 7.3% |
CET1 Ratio | 11.2% | 11.0% | 11.4% | 11.2% | 10.4% |
NPL Ratio | 1.40% | 1.56% | 1.43% | 1.37% | 1.34% |
Credit Costs | 1.10% | 1.16% | 1.03% | 0.79% | 0.82% |
Loan-Deposit Ratio | 71% | 74% | 78% | 79% | 77% |
CreditSights View
AS OF 01 Apr 2024AGRBK is the 3rd-largest of the Chinese state-owned commercial banks and has a strong deposit franchise, especially in rural areas, which gives it access to a large pool of low-cost deposits. We view it as a strong credit taking into account its structural profitability, robust balance sheet metrics, large size and systemic importance that assure it of state support if needed. Its loan growth has been the strongest among the Big 5 banks since FY22, but the impact on NII growth was largely offset by NIM contraction. Capital ratios are behind the other Big 4. Reserve cover is a strength. Due to China’s weaker macro outlook, challenging prospects for the sector, and tighter spreads compared to elsewhere in Asia, we have an Underperform recommendation on the bank.
Recommendation Reviewed: April 01, 2024
Recommendation Changed: August 22, 2023