Region: China
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Fundamental View
AS OF 24 May 2024Our credit view on China Construction Bank (CCB; ratings: A1(neg)/A(stb)/A(neg)) 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 24 May 2024- 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 57.14% 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 24 May 2024China’s sovereign ratings (A1(neg)/A+(stb)/A+(neg)) underpin CCB’s credit standing; any deterioration in the sovereign ratings will negatively affect CCB’s ratings.
CCB may be asked by the government to perform “national service” that overrides profitability considerations, e.g. supporting troubled property developers and the real economy by extending loans at lower rates. We would not regard such actions as credit-negative as they reflect close government links that also underpin the bank’s credit standing.
As a G-SIB, CCB has a substantial TLAC shortfall to meet by 1 January 2028, whereas meeting the 1 January 2025 requirement appears manageable. It has announced a proposal to issue up to RMB 50 bn of TLAC bonds this year.
Key Metrics
AS OF 24 May 2024RMB bn | FY20 | FY21 | FY22 | FY23 | 1Q24 |
---|---|---|---|---|---|
PPOP ROA | 1.96% | 1.87% | 1.66% | 1.44% | 1.54% |
Reported ROA | 1.02% | 1.04% | 1.00% | 0.91% | 0.89% |
Reported ROE | 12.1% | 12.6% | 12.3% | 11.6% | 11.6% |
Equity/Assets | 8.4% | 8.6% | 8.3% | 8.2% | 8.2% |
CET1 Ratio | 13.6% | 13.6% | 13.7% | 13.1% | 14.1% |
NPL Ratio | 1.56% | 1.42% | 1.38% | 1.37% | 1.36% |
Provisions/Average Loans | 1.19% | 0.95% | 0.77% | 0.61% | 0.79% |
Loan-Deposit Ratio | 81% | 84% | 85% | 86% | 85% |
CreditSights View
AS OF 11 Jul 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. Profits declined YoY in 1Q24 due to lower core topline revenues on NIM compression and lower fee income. 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: July 11, 2024
Recommendation Changed: August 22, 2023
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Fundamental View
AS OF 24 May 2024The Bank of China (BCHINA; ratings: A1(neg)/A(stb)/A(neg)) 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 24 May 2024- 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 66.06%-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 64.13% 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 24 May 2024China’s sovereign ratings (A1(neg)/A+(stb)/A+(neg)) 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 FY23. However, its NIM will also be under pressure in FY24 as peak NIMs have largely been hit overseas.
As a G-SIB, BCHINA has a substantial TLAC shortfall to meet by 1 January 2025 and 1 January 2028. It has announced plans to issue RMB 150 bn of TLAC notes.
Key Metrics
AS OF 24 May 2024RMB bn | FY20 | FY21 | FY22 | FY23 | 1Q24 |
---|---|---|---|---|---|
PPP ROA | 1.55% | 1.48% | 1.39% | 1.31% | 1.29% |
Credit Costs | 0.87% | 0.70% | 0.63% | 0.57% | 0.68% |
Reported ROA | 0.87% | 0.89% | 0.85% | 0.80% | 0.73% |
Reported ROE | 10.6% | 11.3% | 10.8% | 10.1% | 9.9% |
Total Equity/Total Assets | 8.4% | 8.3% | 8.4% | 8.1% | 7.9% |
CET1 Ratio | 11.3% | 11.3% | 11.8% | 11.6% | 12.0% |
NPL Ratio | 1.46% | 1.33% | 1.32% | 1.27% | 1.24% |
Loan-Deposit Ratio | 84% | 87% | 87% | 87% | 87% |
CreditSights View
AS OF 11 Jul 2024BCHINA is one of the Big 4 banks (4th largest by assets) with a reasonable capital stack and sufficient liquidity. Its majority government ownership and systemic importance 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. Its overseas footprint has helped to counter the onshore NIM pressure in 1H23, but the NIM advantage is waning as overseas funding costs catch up and rate cuts loom. Net profit declined YoY in 1Q24 due to a lower NIM and fee income, while provisions also rose. Due to China’s weaker macro outlook, challenging prospects for the sector, and tighter spreads than elsewhere in Asia, we have a U/P rec.
Recommendation Reviewed: July 11, 2024
Recommendation Changed: August 22, 2023
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Fundamental View
AS OF 24 May 2024Our credit view on ICBCAS (ratings: A1(neg)/A(stb)/A(neg)) is based on the 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 its status as China’s largest lender; it plays a key role in financing the country’s economic development.
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 24 May 2024- With total assets in excess of RMB 44.5 tn, ICBCAS is the world's largest bank by assets and is classified as a G-SIB with a capital surcharge of 1.5%.
- ICBCAS was originally set up in 1984 to provide loans to China's large state-owned industrial corporations.
- ICBCAS was recapitalised in 2005 with an injection of $15 bn, following which it was listed in Hong Kong and Shanghai in 2006.
- The government owns a majority of ICBCAS's shares through Central Huijin and the Ministry of Finance, which own stakes of 34.79% and 31.14% respectively.
- In addition to a strong onshore presence, ICBC has an extensive international network as well.
Risk & Catalysts
AS OF 24 May 2024China’s sovereign ratings (A1(neg)/A+(stb)/A+(neg)) underpin ICBCAS’s credit standing; any deterioration will negatively affect ICBCAS’s ratings.
Asset quality risk remains as China’s economic recovery is slow and the property sector has yet to see a meaningful recovery. Transparency is limited and credit risks are hard to assess in China as these often depend on the government’s willingness to socialise losses.
ICBCAS is managed on commercial terms, but the government may call on it to perform “national service” that overrides profitability considerations. 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.
As a G-SIB, ICBCAS has a substantial TLAC shortfall to meet by 1 January 2028, whereas meeting the 1 January 2025 requirement appears manageable. It announced in February a proposal to issue up to RMB 60 bn of TLAC bonds in the onshore market.
Key Metrics
AS OF 24 May 2024RMB bn | FY20 | FY21 | FY22 | FY23 | 1Q24 |
---|---|---|---|---|---|
PPP ROA | 1.87% | 1.82% | 1.61% | 1.35% | 1.40% |
Reported ROA | 1.00% | 1.02% | 0.97% | 0.87% | 0.76% |
Reported ROE | 12.0% | 12.2% | 11.5% | 10.7% | 10.1% |
Total Equity/Total Assets | 8.7% | 9.3% | 8.8% | 8.4% | 8.1% |
CET1 Ratio | 13.2% | 13.3% | 14.0% | 13.7% | 13.8% |
NPL Ratio | 1.58% | 1.42% | 1.38% | 1.36% | 1.36% |
Provisions/Average Loans | 1.15% | 1.03% | 0.83% | 0.61% | 0.90% |
Loan Deposit Ratio | 74% | 78% | 78% | 78% | 78% |
CreditSights View
AS OF 30 Apr 2024ICBCAS is the largest bank by assets in the world and has a very strong franchise in China. Its majority government ownership adds to its systemically important status. It has peer-leading capital ratios. 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. Profits declined YoY in 1Q24 due to lower core topline revenues on NIM compression and lower fee income. 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 30, 2024
Recommendation Changed: August 22, 2023
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Fundamental View
AS OF 23 May 2024Huarong AMC (HRINTH) has credit ratings of Ba1(neg)/BBB-/BBB(neg). A large impairment loss in FY20 brought HRINTH to the brink of insolvency, but a state-led rescue plan provided HRINTH with liquidity support and brought its capital back above minimum requirements. We are more comfortable with longer duration exposure to HRINTH now following its closer relationship with the CITIC Group via a name change to CITIC Financial AMC, a stake in CITIC Ltd and management changes.
HRINTH has been heeding top-down guidance to divest its non-core business units.
We expect HRINTH’s operational performance to remain weak until China’s economy is back on the upswing, residents regain confidence in the property market, and improved capital markets lead to better valuations on their securities books.
Business Description
AS OF 23 May 2024- China Huarong Asset Management Company is one of the four large state-owned asset management companies in China. It was first set up in 1999 to takeover the bad debts of ICBC.
- The AMCs were originally due to be wound up after dealing with these "policy loans" that had come onto the books of the banks under government direction before their commercialisation, but the AMCs found a new role as commercial bad debt managers.
- HRINTH was commercialised in 2012 and completed its IPO on the Hong Kong Stock Exchange in 2015. Since its commercialisation, HRINTH has expanded its financial services to banking (Huarong Xiangjiang Bank), financial leasing (Huarong Financial Leasing), securities & futures (Huarong Securities, Huarong Rongde), trust (Huarong Trust), as well as consumer finance (Huarong Consumer Finance). However, after a near blowup in FY20 due to heavy losses, HRINTH divested much of its non-core business as directed by the government.
- Following the CITIC-led rescue plan of HRINTH and the planned equity transfer from the Ministry of Finance (MOF) to CITIC, CITIC has became HRINTH's largest shareholder (26.46%). Other significant shareholders include MOF (24.76%), Zhongbaorongxin (18.08%), Cinda AMC (4.89%), China Life Insurance (4.50%), National Social Security Fund (3.08%), Warburg Pincus (2.57%), and ICBC Financial Asset Investment (2.44%) at end-Dec 2023.
Risk & Catalysts
AS OF 23 May 2024HRINTH’s operating performance will remain weak in the near term, and capital ratios will likely be maintained above the minimum requirements via the sale of subsidiaries and a contraction in high-risk restructuring-type DDAs. As such, there could be continued volatility in the name given the weak standalone.
AMCs may find it harder to dispose acquired assets at good valuations amid a growth deceleration in the Chinese economy. Longer holding periods and lower fair values of acquired distressed assets could dampen return yields and increase the NPL ratio of restructuring-type DDAs.
CITIC has replaced the MoF as HRINTH’s largest shareholder, while the MOF’s stake has decreased from 27.76% to 24.76% at end-Dec 2023. This doesn’t change our expectation of support from the authorities for this name, at least in the near term.
Key Metrics
AS OF 23 May 2024CNY mn | FY19 | FY20 | FY21 | FY22 | FY23 |
---|---|---|---|---|---|
ROA | 0.10% | (6.40%) | 0.10% | (2.20%) | 0.02% |
ROE | 1.2% | (147.6%) | 1.0% | (49.8%) | 3.6% |
Impairments/Credit-Related Income | 58% | 722% | 61% | (413%) | (645%) |
Cost-To-Income Ratio | 52% | (16%) | 63% | (22%) | 81% |
Total Capital Ratio | 15.3% | 4.2% | 13.0% | 15.1% | 15.1% |
Leverage Ratio | 9.2x | 1,330.0x | 14.2x | 16.1x | 11.5x |
Equity/Assets | 7.1% | 1.1% | 3.8% | 5.2% | 5.0% |
CreditSights View
AS OF 01 Apr 2024Huarong turned a profit in FY23 but performance of the core DDA businesses has remained weak given the macro environment. The capital adequacy ratio improved HoH and now has a buffer of 261 bp above the minimum requirement of 12.5%, but the CET1 and Tier 1 ratios disappointingly remain undisclosed. Huarong’s $ bond prices have continued to rise since its first announcement of open market repurchase in late Sep-23 and have risen again post its announcements related to a closer relationship with the CITIC Group, via a name change to CITIC Financial AMC, a stake in CITIC Ltd and management changes. The name still offers spread, although the CCAMCL-HRINTH spread differential has tightened to around 100 bp. Absent the new investment in associates, Huarong would have continued large losses.
Recommendation Reviewed: April 01, 2024
Recommendation Changed: August 31, 2021
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Fundamental View
AS OF 17 Apr 2024We expect the credit profile of Sinopec, which is one of the three Chinese national oil companies (NOCs) to continue to be underpinned by its strategic role in China’s energy security and the resulting strong government support.
We expect Sinopec’s standalone credit profile to remain supported in FY24 by resilient refined oil demand and improving demand for chemical products as industrial activities pick up and the destocking trend ends.
To note, we use the financials of HKEx listed Sinopec Corp (386.HK) as a proxy for the credit profile of its parent, the obligor of the outstanding $ bonds (BBG: SINOPE).
Business Description
AS OF 17 Apr 2024- Sinopec Group is a Chinese integrated oil and gas (O&G) company and is one of the largest globally & domestically. In FY23, 56.1% of Sinopec Corp' external revenues came from marketing and distribution (i.e. retail and direct sales of refined oil), 13.1% from chemicals, 5.4% from refining, and 5.7% from E&P. Corporate and others segment accounted for the remaining 19.7% of sales revenue, consisting of import and export business, R&D and managerial activities.
- The refining segment purchases crude oil from third parties as well as the E&P segment of the company, and processes crude oil into refined petroleum product. Most of the gasoline, diesel and kerosene are sold internally to the marketing and distribution segment of the company; part of the chemical feedstock is sold internally to the chemical segment, and the other refined petroleum products are sold externally to both domestic and overseas customers. The marketing and distribution segment purchases refined oil products from the refining segment and third parties, and mainly distributes to domestic customers via its wholesale and retail networks.
- In FY23, Sinopec's total oil and gas output was 504 mn barrels of oil equivalent (mmboe), up 3.1% YoY; this included 252/29 mmbbls (+0.3%/-1.9%) of domestically produced/overseas crude oil, as well as 1,338 bcf of natural gas (+7.1% YoY). The average realized price of its crude oil and natural gas was $76.6/bbl and $7.1/thousand cubit feet respectively.
Risk & Catalysts
AS OF 17 Apr 2024Risks: Lower-than-expected domestic sales of refined oil and chemical products due to a severe economic downturn, higher-than-expected crude oil and gas feedstock costs resulted from geopolitical tensions, elevated inventory losses due to tumbling oil & gas prices, and large capex overrun result in a weaker standalone credit profile. However, we expect the strong government support to offset these downside risks. US sanction related headline risks due to US-China tension and other geopolitical risks.
Catalysts: inflow into China $ bonds as a result of improving China macro outlook and US-China relationship; stronger-than-expected recovery in chemical product demand.
Key Metrics
AS OF 17 Apr 2024RMB bn | FY19 | FY20 | FY21 | FY22 | FY23 |
---|---|---|---|---|---|
Total Debt/Capitalization | 27.8% | 25.3% | 25.6% | 27.5% | 31.5% |
Net Debt/Capitalization | 17.3% | 9.4% | 7.6% | 16.3% | 19.8% |
Total Debt/Total Equity | 38.6% | 33.8% | 34.5% | 38.0% | 46.1% |
Total Debt/Total Assets | 19.2% | 17.2% | 16.7% | 18.3% | 21.7% |
Total Debt/EBITDA | 1.6x | 1.5x | 1.2x | 1.5x | 2.0x |
Net Debt/EBITDA | 1.0x | 0.6x | 0.4x | 0.9x | 1.3x |
EBITDA/Gross Interest | 12.9x | 16.8x | 20.1x | 16.1x | 14.5x |
EBITDA Margin | 7.3% | 9.5% | 9.4% | 7.0% | 6.8% |
CreditSights View
AS OF 17 Apr 2024We affirm our Market perform recommendation on Sinopec (A1/A+/A+). A-rated Chinese state-owned enterprises (SOEs), including Sinopec are trading tight due to a lack of new supply and as investors fly to quality amid macro uncertainties in China. We continue to prefer AA-rated Korean quasi-sovereign names for safe carry (like KOROIL, KORGAS, KEPCO) and higher-beta Chinese SOEs for spread pickup.
Recommendation Reviewed: April 17, 2024
Recommendation Changed: May 03, 2021
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