RATING ACTION COMMENTARY Fitch Downgrades Minsheng 's Viability Rating; Affirms Five Chinese Mid-Tier ' 'BB+' IDRs

Wed 29 Apr, 2020 - 上午 5:01 ET

Fitch Ratings - /Shanghai - 29 Apr 2020: Fitch Ratings has downgraded the Viability Rating on Minsheng Banking Corp., Ltd. (CMBC) to 'b', from 'b+'. At the same time, Fitch has affirmed the Long-Term Foreign-Currency Issuer Default Ratings (IDR) of CMBC and four other Chinese mid-tier commercial banks at 'BB+', which are driven by sovereign support. The Outlooks are Stable.

The four other banks are Co., Ltd., (BOB), Co., Ltd. (PAB), Hua Xia Bank Co., Limited (HXB) and China Guangfa Bank Co., Ltd. (CGB).

KEY RATING DRIVERS

IDRS, SUPPORT RATINGS AND SUPPORT RATING FLOORS

All of the banks' IDRs are based on state support and are at the banks' Support Rating Floors of 'BB+'. This reflects Fitch's expectation of a moderate probability of extraordinary support from the Chinese sovereign (A+/Stable) in the event of stress. This is based on the banks' size, domestic significance and ownership structure. The banks do not have direct central-government ownership or history of direct government support, despite their status as national joint-stock commercial banks (except for BOB, which is a city commercial bank). The Stable Outlook reflects Fitch's expectations that the propensity for sovereign support remains unchanged, despite the coronavirus pandemic.

State-owned investors, including insurers, have become strategic investors in a few joint-stock banks. Fitch does not factor in institutional support from these investors, as their long-term strategic intentions are unclear. In addition, the high risk of financial-system contagion may limit the investors' ability to assist the banks, while the banks' size relative to that of the shareholders creates doubt over the investors' ability to provide support. As such, Fitch expects support to come primarily from the state, unless the portion of private ownership increases significantly and results in a meaningful reduction of state or policy influence.

VIABILITY RATINGS We expect Chinese banks to face sharp asset quality and profitability pressures due to the pandemic, as Fitch estimates China's GDP growth will fall to 0.7% in 2020, before recovering to 7.9% in 2021. The extent of deterioration is contingent on the duration of the economic disruption, both domestically and abroad, though recognition of asset impairment may lag, leading to some core financial metrics being less comparable relative to other jurisdictions. Near-term profitability will be hurt by narrowing net interest margins and higher asset impairment charges, as reflected in a negative outlook for earnings and profitability at some banks, even as they lower their allowance ratios. Erosion of capital is possible, especially if banks accelerate lending to support the domestic economy. The presence of large shadow financing activities in China, although improving since tighter regulations took place since 2017, may also understate asset quality risk and risk appetite.

Most Chinese commercial banks have expressed deteriorating trends in their consumer asset quality, with some reporting escalating delinquencies in consumer and credit-card loans since February 2020 due to pandemic-related lockdown measures. We believe the weaker global growth outlook will drag on China's economic recovery and banks' financial performance, even though customer activity had largely recovered in March. Regulatory relief has been extended to mitigate the impact from the pandemic, including liquidity support to medium and small enterprises (MSE), loan rollovers and interest waivers for affected sectors as well as repayment holidays for troubled retail borrowers. These measures will delay recognition of asset impairment into 2H20 and 2021.

The five mid-tier banks have significantly reduced their exposure to entrusted investments in the past few years and their exposure to wealth-management products (WMPs) has declined, albeit still ranging from 12%-22% of assets based on the most recent disclosure of each bank. Broader regulatory commitment to containing financial-sector risks and system leverage will have a more lasting impact on our assessment of China's operating environment than near-term asset quality and profitability pressure. The outlook on the operating environment for the five mid-tier banks is stable, reflecting our view that the 'bb+' mid-point adequately captures systemic risk. There are downside risks to our macroeconomic forecasts, but we do not expect the pandemic to lead to a sustained deterioration in economic conditions beyond what is captured by the current mid-point.

The Viability Ratings of the five mid-tier banks, which are in the 'b' category and denote weak intrinsic strength, reflect the banks' perceived high risk appetite and limited risk buffers.

CMBC

The downgrade of CMBC's Viability Rating reflects its limited risk buffers relative to its higher exposure to MSE loans and credit-card lending, with each contributing 13% to total loans in 2019. Its entrusted investments, at around 12% of assets, and outstanding off-balance-sheet WMPs, at around 25% of deposits and 13% of assets, were also large relative to the bank's thin capital buffers; its common equity Tier 1 (CET1) ratio was a low 8.9% at end-2019. CMBC's reported non-performing loan (NPL) ratio was 1.6% at end-2019, and while the allowance coverage ratio increased to 156%, it was one of the lowest among Fitch-rated Chinese banks, providing limited room to absorb expected deterioration due to the pandemic relative to more highly-rated peers. CMBC issued CNY40 billion in additional Tier 1 perpetual bonds in May 2019, but these do not quality as core capital.

BOB

BOB's Viability Rating benefits from its higher loan concentration in Beijing, at around half of its loans, with a reported NPL ratio of around 1.5% at end-1Q20. BOB heavily relies on corporate banking, especially for loans to Beijing-based state-owned enterprises (SOE), and has the lowest exposure to sectors that are most affected by the pandemic, such as consumer lending. Its loan mix should mitigate capitalisation pressure relative to the other mid-sized banks in this review, but BOB is one of the few banks that are still expanding its entrusted investments, which were around 16% of assets at end-1H19. This may indicate a rising risk appetite relative to peers. BOB plans to issue up to CNY40 billion in additional Tier 1 preference shares, which could lift its pro forma Tier 1 ratio by around 2pp; its CET1 ratio was 9.5% at end-1Q20.

PAB

PAB's Viability Rating takes into account its higher exposure and rapid growth in credit-card receivables and consumer loans. This may render its asset quality and earnings more susceptible to deterioration given the pandemic, although we believe the risks are already captured in its Viability Rating. Full conversion of CNY26 billion in convertible bonds lifted PAB's CET1 ratio to 9.8% by end-3Q19, but the capital was quickly consumed by rapid loan growth in 4Q19; its CET1 ratio was 9.2% at end-1Q20. PAB's reported stage-three loan ratio improved to 2.0% in 2019, from 2.9% in the previous year, under IFRS9, but remained higher than its reported non-performing loans of 1.6%. PAB's operating profit/risk-weighted assets also remained below the mid-tier average due to its higher loan-impairment charges.

HXB

HXB's Viability Rating takes into account its higher corporate loan exposure, greater geographic focus on north and north-eastern China as well as faster loan growth. HXB's reported non-performing loan ratio remained the highest among Fitch-rated Chinese banks, at 1.8% at end-2019. Manufacturing and wholesale/retail trade loans, which we consider to be more vulnerable to the pandemic, remained at a high 10% and 8%, respectively, of total loans at end-2019. HXB has a lower exposure to entrusted investments than mid-tier peers, at around 7% of assets in 2019, but this is balanced against its above-peer WMP exposure, at around 22% of assets. Rapid loan growth in recent years has weakened the bank's capitalisation and liquidity profile; its CET1 ratio fell to 9.3% in 2019, while its loan/deposit ratio of 113% was the highest among Fitch-rated Chinese banks.

CGB

CGB's Viability Rating reflects its weaker profitability and above-peer exposure to credit-card lending, though efforts to increase cooperation with its largest shareholder, China Life Insurance Company Limited (A/Stable), may strengthen CGB's corporate franchise over time. CGB's reported NPL ratio was around 1.5% at end-2018, but credit-card lending contributed around 36% of CGB's total loans. CGB's profitability was the weakest among Fitch-rated mid-tier banks due to its small deposit franchise and high operating costs in 2018. This is balanced against its smaller shadow-banking exposure, with entrusted investments and WMPs both below the mid-tier sector average. The bank's CET1 ratio improved to 9.4% in 2018, after the completion of a private share placement during the year. CGB also plans a public listing, but the timing and size remains uncertain.

RATING SENSITIVITIES

IDRS, SUPPORT RATINGS AND SUPPORT RATING FLOORS

Factors that could, individually or collectively, lead to negative rating action/downgrade:

The banks' IDR will come under pressure if Fitch perceives that the state's ability to support the banking sector is undermined by the increasing size of the financial system. In addition, significant changes in the sector's liability structure, such as the banks becoming more reliant on wholesale or offshore funding, may affect the ability and propensity of the state to support the entire financial system - especially less systemically important banks - in the longer term.

Fitch expects the state's propensity to support the banking sector to remain high (and extremely high for systemically important banks) in the near term, but we believe the state's ability and propensity to support different tiers of banks would vary in the event of system wide stress, with mid-tier banks unlikely to receive the same level of support as larger state banks. A reduction in state ownership, either directly or indirectly through local governments or SOEs, may also lower the propensity of the state to support the banks if the reduction is significant and limits state influence and the level of perceived systemic importance of the banks.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

An upgrade of the sovereign ratings could lead to positive rating action on the banks' Support Rating Floors and support-driven IDRs if that was to indicate greater ability to support the banks (with no less propensity to support them), though this is not our base case under a deep global recession. The designation of domestic systemically important banks (D-SIB) could also lead to changes in Support Ratings, Support Rating Floors and, in turn, IDRs, if this implies the systemic importance of the selected banks is higher than what is implied in our support assessment.

VIABILITY RATINGS

Factors that could, individually or collectively, lead to negative rating action/downgrade: CMBC

CMBC's Viability Rating could be downgraded if the bank's acceleration in growth, especially in MSE loans and shadow-banking activities, results in a sharp increase in asset impairments. Deterioration in asset quality that leads to a significant decline in profitability and capital buffers may also lead to a downgrade, as could a sustained deterioration in the bank's reported financial metrics, including a combination of impaired loans/gross loans increasing to above 5% and the CET1 ratio falling below 7.5% without a credible plan to return it to current levels.

BOB

BOB's Viability Rating could be downgraded if there is a sustained increase in BOB's risk appetite, evident from continuous growth in entrusted investments or WMPs that significantly erodes asset quality and capital buffers. A deterioration of the following reported core metrics could also lead to a Viability Rating downgrade; impaired loans/gross loans increasing to above 5% and the CET1 ratio falling below 8.5% without a credible plan to return it to current levels.

PAB

PAB's Viability Rating could be downgraded if excessive loan growth in credit-card receivables, at the expense of lower underwriting standards or significant household affordability deterioration, leads to a sharp deterioration in asset quality and capital buffers. A sustained deterioration in the bank's reported financial metrics could also lead to Viability Rating downgrade, including a combination of impaired loans/gross loans increasing to above 5% and the CET1 ratio falling below 7.5% without a credible plan to return it to current levels.

HXB

HXB's Viability Rating could be downgraded if acceleration in loan growth, especially in manufacturing and wholesale/retail loans, further drags on asset quality and capital buffers. Deterioration of the following reported core metrics could also lead to a downgrade; impaired loans/gross loans increasing to above 5% and the CET1 ratio falling below 7.5% without a credible plan to return it to current levels.

CGB

CGB's Viability Rating could be downgraded if aggressive growth in credit-card loans or significant household affordability deterioration continues to expose the bank to additional risk taking and results in weaker asset quality. Higher impairment charges could further drag earnings, profitability, capital generation and ultimately, its Viability Rating. Deterioration of the following reported core metrics could also lead to a downgrade; impaired loans/gross loans increasing to above 5% and the CET1 ratio falling below 7.5% without a credible plan to return it to current levels. Factors that could, individually or collectively, lead to positive rating action/upgrade:

Positive action on the Viability Rating is not probable until there is a sustained recovery and stabilisation of China's and the global economy to ease pressure on the operating environment. We do not expect this to occur until well into 2021.

BEST/WORST CASE RATING SCENARIO

International scale credit ratings of Financial Institutions 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 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

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 five mid-tier banks' Issuer Default Ratings are link to the Chinese sovereign rating.

ESG CONSIDERATIONS

All five banks have an ESG relevance score of 4 for financial transparency risk due to under-reporting of non-performing loans and risk-weighted assets stemming from the use of off-balance-sheet transactions. This negatively affects the banks' credit profiles and is relevant to the rating in conjunction with other factors.

Except for the matters discussed above, the highest level of ESG credit relevance, if present, is a score of 3. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity(ies), either due to their nature or to the way in which they are being managed by the entity(ies). For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.

RATING ACTIONS ENTITY/DEBT RATING PRIOR Hua Xia Bank Co., LT IDR BB+ Affirmed BB+ Limited Viability b Affirmed b Support 3 Affirmed 3 Support BB+ Affirmed BB+ Floor Bank of Beijing Co., LT IDR BB+ Affirmed BB+ Ltd. Viability b+ Affirmed b+ Support 3 Affirmed 3 Support BB+ Affirmed BB+ Floor Ping An Bank Co., LT IDR BB+ Affirmed BB+ Ltd. Viability b Affirmed b Support 3 Affirmed 3 Support BB+ Affirmed BB+ Floor China Minsheng LT IDR BB+ Affirmed BB+ Banking Corp., Ltd. Viability b Downgrade b+ Support 3 Affirmed 3 Support BB+ Affirmed BB+ Floor China Guangfa Bank LT IDR BB+ Affirmed BB+ Co., Ltd. Viability b Affirmed b Support 3 Affirmed 3 Support BB+ Affirmed BB+ RATING ACTIONS ENTITY/DEBT RATING PRIOR Floor VIEW ADDITIONAL RATING DETAILS

Additional information is available on www.fitchratings.com

The following issuer(s) did not participate in the rating process, or provide additional information, beyond the issuer's available public disclosure: Bank of Beijing Co., Ltd., China Minsheng Banking Corp., Ltd., Hua Xia Bank Co., Limited

APPLICABLE CRITERIA

• Bank Rating Criteria (pub. 29 Feb 2020) (including rating assumption sensitivity)

ADDITIONAL DISCLOSURES

• Dodd-Frank Rating Information Disclosure Form • Solicitation Status • Endorsement Policy

ENDORSEMENT STATUS

Bank of Beijing Co., Ltd. EU Endorsed China Guangfa Bank Co., Ltd. EU Endorsed China Minsheng Banking Corp., Ltd. EU Endorsed Hua Xia Bank Co., Limited EU Endorsed Ping An Bank Co., Ltd. EU Endorsed ADDITIONAL DISCLOSURES FOR UNSOLICITED

CREDIT RATINGS

Bank of Beijing Co., Ltd. (Unsolicited) With Rated Entity or Related Third Party Participation No With Access to Internal Documents No With Access to Management No

China Guangfa Bank Co., Ltd. (Unsolicited) With Rated Entity or Related Third Party Participation Yes With Access to Internal Documents Yes With Access to Management No

China Minsheng Banking Corp., Ltd. (Unsolicited) With Rated Entity or Related Third Party Participation No With Access to Internal Documents No With Access to Management No

Hua Xia Bank Co., Limited (Unsolicited) With Rated Entity or Related Third Party Participation No With Access to Internal Documents No With Access to Management No

Ping An Bank Co., Ltd. (Unsolicited) With Rated Entity or Related Third Party Participation Yes With Access to Internal Documents Yes With Access to Management Yes

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SOLICITATION STATUS

The ratings above were solicited and assigned or maintained at the request of the rated entity/issuer or a related third party. Any exceptions follow below.

UNSOLICITED ISSUERS ENTITY/SECURITY ISIN/CUSIP/COUPON RATING TYPE SOLICITATION RATE STATUS Bank of Beijing Co., Ltd. - Long Term Issuer Unsolicited Default Rating UNSOLICITED ISSUERS ENTITY/SECURITY ISIN/CUSIP/COUPON RATING TYPE SOLICITATION RATE STATUS Bank of Beijing Co., Ltd. - Viability Rating Unsolicited Bank of Beijing Co., Ltd. - Support Rating Unsolicited Bank of Beijing Co., Ltd. - Support Rating Floor Unsolicited China Guangfa Bank Co., Ltd. - Long Term Issuer Unsolicited Default Rating China Guangfa Bank Co., Ltd. - Viability Rating Unsolicited China Guangfa Bank Co., Ltd. - Support Rating Unsolicited China Guangfa Bank Co., Ltd. - Support Rating Floor Unsolicited China Minsheng Banking - Long Term Issuer Unsolicited Corp., Ltd. Default Rating China Minsheng Banking - Viability Rating Unsolicited Corp., Ltd. China Minsheng Banking - Support Rating Unsolicited Corp., Ltd. China Minsheng Banking - Support Rating Floor Unsolicited Corp., Ltd. Hua Xia Bank Co., Limited - Long Term Issuer Unsolicited Default Rating Hua Xia Bank Co., Limited - Viability Rating Unsolicited Hua Xia Bank Co., Limited - Support Rating Unsolicited Hua Xia Bank Co., Limited - Support Rating Floor Unsolicited Ping An Bank Co., Ltd. - Long Term Issuer Unsolicited Default Rating Ping An Bank Co., Ltd. - Viability Rating Unsolicited Ping An Bank Co., Ltd. - Support Rating Unsolicited Ping An Bank Co., Ltd. - Support Rating Floor Unsolicited

ENDORSEMENT POLICY

Fitch's approach to ratings endorsement so that ratings produced outside the EU may be used by regulated entities within the EU for regulatory purposes, pursuant to the terms of the EU Regulation with respect to credit rating agencies, can be found on the EU Regulatory Disclosurespage. The endorsement status of all International ratings is provided within the entity summary page for each rated entity and in the transaction detail pages for all structured finance transactions on the Fitch website. These disclosures are updated on a daily basis.