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