Pengyuan International Affirms China Merchants Bank’s Rating at ‘A-’; Outlook Stable


17 Sep 2021

    HONG KONG, 17 September 2021. Pengyuan International has affirmed China Merchants Bank’s (CMB) global-scale foreign-currency long-term issuer credit rating (LTICR) at ‘A-’, local-currency LTICR at ‘A-’, and short-term issuer credit rating (STICR) at ‘A-2’. The Outlook is Stable.
    The LTICR is two notches above CMB’s standalone credit profile (SACP) of ‘bbb’, reflecting our external support analysis of the bank’s systemic importance. We believe the Chinese government (‘AA’/Stable) has strong willingness to extend extraordinary support to the bank in times of need. The SACP captures CMB’s satisfying retail franchise, outperforming profitability, and sustaining capitalisation. It also considers concerns over the bank’s real estate credits and wealth management product exposure.
    The Stable Outlook incorporates our expectations that CMB’s resilient internal capital generation and mindful growth appetite will secure an abundant loss-absorption buffer against market swings.
    We would consider lowering the bank’s rating if CMB’s capital and provision buffer weaken sharply as a result of significant deterioration in asset quality.
    We would consider raising the bank’s rating if CMB’s risk-adjusted capital profile improves substantially and/or its systemic importance materially increases, albeit less likely in the near term.

    KEY RATING RATIONALE
    Credit Strengths
    Satisfying Retail Franchise: We expect CMB to keep a strong retail franchise as the largest joint-stock bank in the following 12-18 months, considering its competitive retail penetration, stable low-cost funding base, and established wealth management business. CMB’s retail deposits amounted to RMB2.03 trillion at end-2020, posting a year-over-year expansion of about 12.5%. During the reporting period, the bank’s retail banking segment contributed around 52.1% of operating income and 53.3% of the loan balance with an average yield of 5.89% – higher than corporate loans’ 3.98%.
    Outperforming Profitability: The Shenzhen-based lender’s profitability metrics are likely to continue outperforming most of its local peers’. CMB maintained as the most profitable large bank in China as measured by return on average assets (ROAA) and return on average equity (ROAE) on the cornerstones of its outstanding net interest margin (NIM) and fee income contribution. After continuous enhancement in its profitability during 2016-2019, its ROAA and ROAE respectively declined to 1.23% and 15.73% in 2020 from 1.31% and 16.84% in 2019 due to the COVID-19 pandemic-driven downturn and profit concession measures in response to the government’s call to fund the economic recovery.
    As CMB endeavours to further grow retail loans of higher yield and secures demand deposit of lower costs, we expect CMB’s above-average NIM will remain largely stable with a minor decrease to the ball park of 2.40%-2.44% in 2021-2023 in the face of industry-wide margin compression. The bank’s fee income generation provides diversification benefits and counterbalances the associated earnings pressures. CMB’s net fee and commission income hiked to RMB79.5 billion in 2020, equivalent to a year-over-year jump of 11.2% – up from 7.54% in 2019 and 3.85% in 2018 –with recurring contribution from bank card and wealth management services.
    Sustaining Capitalisation StrengthCMB’s capitalisation is expected to experience a marginal rise within our rating horizon, given its stable asset quality, slower loan growth, and resilient internal capital generation, albeit at a slower pace due to the weakened asset yield which waned to 4.13% in 2020 from 4.38% in 2019. CMB reported a common equity tier 1 (CET1) capital ratio of 12.3%, tier-1 capital ratio of 14.0% and total capital adequacy ratio (CAR) of 16.5% at end-2020, the highest among joint-stock banks’. CMB’s retained profits in 2020 accounted for approximately 10.5% of its core tier-1 capital at end-2020. The stated dividend payout policy remained relatively stable with about 30% of its net profit slated for dividends.
    Improving Asset Quality: CMB’s non-performing loan (NPL) ratio will slightly decline in our projection for 2021-2023 on the management’s mindful risk appetite and moderate non-performing assets. NPL and special-mention loan (SML) ratios respectively showed downward trends to 1.07% and 0.81% at end-2020 from 1.87% and 2.09% at end-2016, due to CMB’s prudent customer selection with effective industry exposure controls and increasing efforts to dispose of non-performing assets.
    We noticed the surge of SML migration rate, which came to a recent high of 38.1% as of end-2020. Nonetheless, we take comfort in the bank’s overall asset quality considering that its coverages for total loan and NPL at 4.67% and 437.7%, which were much higher than the industry averages of 3.39% and 184.5% at-end 2020, respectively.
    Systemically Important in a Domestic Context: While CMB may still fall short of global systemically important banks (G-SIB) inclusion requirements, we believe it is highly likely that it will be officially designated as a domestic systemically important bank (D-SIB) in the foreseeable future given the fact that CMB is the 7th largest commercial bank in China by asset base. CMB’s systemic importance also suggests that its potential failure would lead to significant impacts on the financial system and the real economy. Accordingly, the public sector will have a strong willingness to support the bank in times of distress.
    Credit Weaknesses
    Real Estate Credit Concerns: CMB will continue to be sensitive to changes in the operating environment, especially in the real estate market, in view of its meaningful mortgage portfolio and exposures to the property developers. As of end-2020, the bank’s property-related loans and retail mortgages respectively represented about 33.1% and 25.4% of total loans, both of which were already above the new regulatory threshold. Any aggressive pursuit of real estate loans for profits may pressure the bank’s credit profile. That said, according to its annual reports, the bank’s average NPL ratio of domestic real estate exposures fell to 0.22% at end-2020, from 0.36% at end-2019 and 1.09% at end-2018, which helped contain the risks.
    Wealth Management Product (WMP) Exposure: CMB’s WMP exposure will remain our concern in the coming 12-18 months. We expect the off-balance sheet WMPs will optimise as per the new regulation whose implementation deadline has been extended to end-2021. According to the bank’s annual report, CMB’s WMPs reached to RMB2.45 trillion at end-2020, of which the off-balance sheet portion was around 99.97% - relatively higher than that of its larger peers. CMB’s expected credit losses of financial investments boosted to RMB15.4 billion in 2020 from RMB6.5 billion in 2019, which was mainly due to the accrued provision for potential impairment losses arising from the disposal of off-balance sheet WMPs, according to their risk profiles.

    ANALYST CONTACTS
    Primary Analyst
    Kaichung Lee
    +852 3615 8340
    kaichung.lee@pyrating.com
    Secondary Analyst
    Ke Chen, PhD
    +852 3615 8316
    ke.chen@pyrating.com
    Committee Chair
    Winnie Guo
    +852 3615 8344
    winnie.guo@pyrating.com
    MEDIA ENQUIRIES
    Charley Lui
    +852 3615 8296
    charley.lui@pyrating.com
    RATING SERVICES ENQUIRIES
    Allen Wei
    +852 3615 8324
    allen.wei@pyrating.com
    Date of Relevant Rating Committee: 6 September 2021
    Additional information is available on www.pyrating.com

    Related Criteria
    Global Banking Rating Criteria (16 August 2019)
    Government-Related Entities Rating Criteria (31 August 2018)


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