TEXT-S&P summary: China Construction Bank Corp.

Mon Dec 3, 2012 6:29am EST

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(The following statement was released by the rating agency)

Dec 03 -

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Summary analysis -- China Construction Bank Corp. ----------------- 03-Dec-2012

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CREDIT RATING: A/Stable/A-1 Country: China

Primary SIC: Commercial banks,

nec

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Credit Rating History:

Local currency Foreign currency

29-Nov-2011 A/A-1 A/A-1

03-Sep-2008 A-/A-2 A-/A-2

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Ratings Score Snapshot

Issuer Credit Rating A/Stable/A-1

SACP bbb-

Anchor bbb-

Business Position Strong (+1)

Capital and Earnings Moderate (-1)

Risk Position Moderate (-1)

Funding and Liquidity Above Average

and Strong (+1)

Support +4

GRE Support +4

Group Support 0

Sovereign Support 0

Additional Factors 0

Outlook

The stable outlook on CCB primarily reflects the outlook on the long-term sovereign credit rating on China. The outlook also reflects our expectation that CCB could maintain its SACP and that the likelihood that extraordinary government support for the bank will remain "very high."

We could raise the rating if we upgrade China and CCB's SACP improves to 'bbb'. An improvement in the bank's SACP to 'a-' could also trigger an upgrade. The SACP could benefit if: (1) CCB significantly enhances its capital, leading us to assess the bank's capital and earnings as "adequate;" or (2) CCB maintains a better-than-projected credit loss experience in a reasonably stressful environment, indicating at least an "adequate" risk position.

We could lower the rating on CCB if we downgrade the sovereign or the bank's SACP deteriorates to 'bb+'. Substantially weakened capitalization that leads us to assess that the bank's capital and earnings are "weak" could cause such deterioration.

Rationale

The rating on China Construction Bank Corp. (CCB) reflects the bank's 'bbb-' stand-alone credit profile (SACP) and our view that there is a "very high" likelihood that the government of China (AA-/Stable/A-1+; cnAAA/cnA-1+) would provide timely and sufficient extraordinary support if the bank comes under financial distress.

We classify CCB as a government-related entity and have incorporated a four-notch uplift to the rating from the SACP. In accordance with our criteria for government-related entities, our view of a "very high" likelihood of extraordinary government support is based on our assessment of the following CCB characteristics:

-- "Very important" role to the Chinese government. In our view, the government tends to treat the banking sector as a lever to realize its economic goals. We believe the major state-owned commercial banks, including CCB, provide core support for the government's projects and economic goals. The banking sector's lending spree in 2009-2010 to help the government's fiscal stimulus scheme supports our view.

-- "Very strong" link with the government. We believe the government's 57.14% stake in CCB is strategic and long term. The government has publicly reiterated its intention to hold a controlling right in major state-owned commercial banks, including CCB. It also effectively appoints or nominates the majority of the bank's directors and top managers.

CCB's SACP reflects the bank's "strong" business position, "moderate" capital and earnings, "moderate" risk position, "above-average" funding, and "strong" liquidity, as our criteria define these terms.

Our bank criteria use our Banking Industry Country Risk Assessment (BICRA) economic risk and industry risk scores to determine a bank's anchor, the starting point in assigning an issuer credit rating. The anchor for a commercial bank operating only in China is 'bbb-'. CCB predominantly operates in China, with offshore lending accounting for 5.7% of its loan portfolio at the end of June 2012. The BICRA score is based on our evaluation of economic risk, where we view China as a moderately resilient developing economy. Significant property price increases and rapid credit expansion over recent years have heightened China's exposure to economic imbalances. The country's high ratio of private credit to GDP and weak payment culture heighten credit risk in the economy. In terms of industry risk, market distortions created by prevalent state ownership and administrative control of interest rates challenge the banking sector. Nonetheless, sector-wide profitability is comparable to that of other sectors in the economy. Systemwide funding benefits from a strong customer deposit base and a proactive government role.

CCB's solid business stability and well-diversified business activities in China support its business position. CCB is the second-largest commercial bank in China. Its vast branch network and specialized knowledge in infrastructure finance and property-related lending underpin its strong domestic franchise. The bank's revenue stream is diverse and mostly recurrent, sourced from a vast and stable customer base across sectors and regions. We view CCB's management and strategy as "adequate," given the bank's comparable pace of business expansion relative to major domestic peers' in recent years, the steady overhaul of its risk management system, and optimization of operational procedures.

We assess CCB's capital and earnings as "moderate." The bank's risk-adjusted capital (RAC) ratio before adjustment for diversification was 6.76% at the end of 2011, up from 6.6% a year earlier. The improvement was mainly due to strong earnings in 2011 and a drop in the dividend payout ratio to about 35% from 40% in the previous year. The bank's ratio of core earnings to average assets was 1.38% in 2011. We expect the RAC ratio to improve slightly over the next two years as the bank's financial performance is likely to moderate and its credit growth is likely to stay at about 13%-15%. Despite CCB's strong profitability in the first three quarters of 2012, the bank is likely to see some contraction in its net interest margin and face rising credit losses in the next two years as its loan portfolio seasons and the Chinese economy slows down significantly.

Our assessment of CCB's risk position primarily reflects a possible spike in the bank's credit losses in the next few years. CCB's loan book grew rapidly in the past few years, particularly in 2009-2010. While its loan growth appears to be less aggressive than that of the industry, its proportionally higher exposure to infrastructure finance and property-related lending could be a weak spot in times of distress. This is despite CCB's credit losses in recent years, as measured by a net charge-off rate, being substantially lower than the normalized losses, according to our RAC framework. The bank's reported nonperforming loan (NPL) ratio of 1% at the end of September 2012 was low, in our view. Although the NPL ratio continued to fall, the bank's outstanding NPLs increased to Chinese renminbi (RMB) 72.95 billion as of Sept 30, 2012, up 2.86% from the level at the end of 2011.

CCB's strong customer deposit base and strong liquidity ratios support our assessment of the bank's funding and liquidity. CCB's stable retail funding base and strong corporate deposit base contributed to a very low ratio of gross loans to customer deposits of 64% at the end of June 2012, according to our calculations. The bank has negligible reliance on wholesale funding. Its liquidity ratios are stronger than the peer group average, with ratios of broad liquid assets to short-term wholesale funding of 2.9x and net broad liquid asset to customer deposits of 22.91% at the end of June 2012.

Related Criteria And Research

-- Banks: Rating Methodology And Assumptions, Nov. 9, 2011

-- Group Rating Methodology And Assumptions, Nov. 9, 2011

-- Banking Industry Country Risk Assessment Methodology And Assumptions, Nov. 9, 2011

-- Bank Hybrid Capital Methodology And Assumptions, Nov. 1, 2011

-- Rating Government-Related Entities: Methodology And Assumptions, Dec. 9, 2010

-- Bank Capital Methodology And Assumptions, Dec. 6, 2010

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