10 Min Read
(The following statement was released by the rating agency)
Dec 17 -
Summary analysis -- Agricultural Bank of China Ltd. --------------- 17-Dec-2012
CREDIT RATING: A/Stable/A-1 Country: China
Primary SIC: Commercial banks,
Credit Rating History:
Local currency Foreign currency
16-Dec-2012 A/A-1 A/A-1
11-Jul-2006 NR/-- --/--
Ratings Score Snapshot
Issuer Credit Rating A/Stable/A-1
Business Position Strong (+1)
Capital and Earnings Moderate (-1)
Risk Position Adequate (-1)
Funding and Liquidity Above Average
and Strong (+1)
GRE Support +4
Group Support 0
Sovereign Support 0
Additional Factors 0
The stable outlook on ABC primarily reflects the stable outlook on the long-term sovereign credit rating on China and our expectation that ABC can maintain adequate credit and financial performances to support its SACP. The bank's financial and credit performances remained satisfactory in the first three quarters of 2012, with a decrease in NPLs despite heightened economic uncertainty at home and abroad. We expect the bank's capitalization and loss buffers to withstand the possible credit loss spike in a reasonable scenario of an economic downturn. We also anticipate that the "very high" likelihood of extraordinary government support will remain available to the bank.
We may raise the rating if we raise the sovereign rating on China and ABC's SACP improves to 'bbb'. The SACP could benefit if: (1) the bank significantly enhances capital, leading to our assessment that its capital and earnings are "adequate"; (2) the bank sustains a better-than-projected credit loss experience in a reasonably distressed economic scenario, indicating at least an "adequate" risk position.
We may lower the rating if the sovereign rating is lowered or ABC's SACP deteriorates to 'bb+', which could arise from: (1) substantially deteriorated capital strength, leading us to assess that the bank's capital and earnings are "weak"; or (2) significantly worse-than-projected credit losses leading to our "weak" assessment of ABC's risk position.
The ratings on Agricultural Bank of China Ltd. (ABC) reflect 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 in the event of the bank's financial distress.
We classify ABC 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 ABC characteristics:
-- "Very important" role to the Chinese government. The government tends to treat the banking sector as a lever to realize its economic goals. We believe major state-owned commercial banks, including ABC, 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. Moreover, the government has mandated ABC to be the key financial services provider to China's "SanNong" segments, namely farmers, agriculture-related industries, and rural communities. The embedded high credit risks and resultant financial underperformance have discouraged other banks from providing services to these financially weak segments.
-- "Very strong" link with the government. We believe the government's 82.7% stake in ABC is strategic and long term. The government has publicly reiterated its intention to hold a controlling right in major state-owned commercial banks, including ABC. The government also effectively appoints or nominates the majority of the bank's directors and top managers.
Standard & Poor's bases ABC's SACP on 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-'. ABC mostly operates in China, with about 2.4% of its loan portfolio extended to overseas markets, notably Hong Kong. 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, while the country's high ratio of private sector 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 has been comparable to other sectors' in the economy. System-wide funding benefits from a strong customer deposit base and proactive government role.
ABC's leading market share and its geographic outreach in China underpin its solid business stability and well-diversified revenue mix in a China context. As the third-largest commercial bank in China by assets, the bank is a dominant player in China's vast county and rural banking market. ABC has sourced most of its revenue from traditional banking businesses from its vast customer base. The bank's strong position in county and rural banking markets places it in a better position than its major peers to benefit from China's urbanization and the ongoing economic catch-up of rural regions.
We expect ABC's mostly recurrent operating revenue to steadily grow in the coming years. Nonetheless, we note that the bank has had a patchy track record in management before early 2000s. We believe ABC's mandate to serve SanNong segments could complicate its operations; the bank has established a SanNong banking business unit for the segment which is operationally independent.
Our assessment of ABC's capital and earnings mainly reflects our expectation that the bank's risk-adjusted capital (RAC) ratio before diversification adjustments will be 6%-7% over the next two years. We expect the RAC ratio to barely change in the next two years. This is based on our anticipation that ABC's loan portfolio will grow at about 13%-15% and its profitability will drop somewhat as a result of a squeeze in its net interest margin and a possible increase in its credit losses. ABC has a wider net interest margin than its major domestic peers, thanks mainly to its lower funding costs than peers. Nonetheless, China's unfolding interest rate liberalization could continue to drive up ABC's funding costs and lower its lending yields. In addition, the bank's SanNong banking business is likely to stay less profitable than the rest of its operations, which could weigh on its overall profitability in the next two or three years at least.
Our assessment of ABC's risk position primarily reflects the bank's rapid loan growth in 2009-2010, proportionally high exposure to financially weak economic segments in China, and resultant losses that were higher than peers in recent years. In particular, the bank's exposure to financially weak county and rural economies does not bode well at a time of a significant economic slowdown in China. Despite ABC's negligible net charge-off rate in the past four years, we believe the bank's credit losses in the next few years could trail its major domestic peers'. Nonetheless, the bank is likely to absorb potential credit losses, given its satisfactory operational profitability and reasonable loan loss reserves. This is barring a severe credit shock scenario stemming from a substantial deterioration in economic conditions. ABC's asset quality improved substantially following a government-engineered disposal of Chinese renminbi (RMB) 817 billion legacy nonperforming loans in 2008. Its nonperforming loans (NPL) ratio was 1.35% as of the end of September 2012, with loan loss reserves at 3.1x outstanding NPLs.
Our assessments of ABC's funding and liquidity reflect the bank's strong customer deposit base and strong liquidity ratios. ABC has the lowest loan-to-deposit ratio--at 55.45% as of the end of September 2012--among all of its major domestic peers. We attribute the low ratio to the bank's good access to China's county and rural economies, where issues such as high credit risks and scarcity of eligible collaterals constrain loan disbursement. As a result, ABC has been consistently the largest net fund provider to China's inter-bank market. Its liquidity ratios are also stronger than the peer group average, with ratios of broad liquid assets to short-term wholesale funding at 3.48x and net broad liquid asset to customer deposits at 28% as of the end of September 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