Moody’s Investors Service affirmed China Banking Corporation’s (PSE: CHIB) credit rating on the back of its strong capitalization and profitability. Deposit and issuer credit ratings remained at Baa2, a notch above the minimum investment grade, with stable outlook.
The international credit watcher cited stable capitalization and profitability, which support business expansion, and sound liquidity as China Bank’s credit strengths.
China Bank’s Common Equity Tier 1 (CET1) capital ratio has been steadily improving: from 13.8% in 2020, to 14.9% in 2021, and to 15.5% as of end-March 2022.
“The improvement in the bank’s capital since 2019 has been higher than the average of its peers, reflecting a combination of low loan growth from the pre-pandemic level in 2019 and increased profitability,” Moody’s noted in its report.
As of end-March 2022, the Bank reported higher annualized core operating profitability (pre-provision income less trading gains as a percentage of assets) of 1.9%. Its annualized return on average assets was at 1.7%, the highest among its rated domestic peers.
“The improvement in profitability for the period was driven by higher NIM (net interest margin), which increased to 4.3% for the three months that ended March 2022 from 4.2% a year earlier. The improvement in NIM was largely because of the low interest and easy liquidity environment, which led to a significant reduction in funding costs,” the Moody’s report stated.
Meanwhile, Moody’s cited asset quality risks resulting from the concentrated loan book and a modest funding profile, with a relatively high share of corporate deposits, as the Bank’s credit challenges.
The business loans segment, which is less susceptible to economic disruptions, comprised 80.1% of China Bank’s gross loans. As of end-March 2022, its non-performing loans (NPL) ratio improved to 2.4% year-on-year from 3.8%.
While China Bank’s market funds/total tangible assets is lower than most of its peers that Moody’s rate, the Bank’s liquid assets/total tangible assets remained largely stable at 30.8% as of end-March 2022.
Moody’s noted that it could upgrade China Bank’s BCA “if the bank’s asset quality reverts to pre-pandemic levels and NIM improves in a rising interest rate environment.” If the bank’s BCA and the Philippines’ sovereign rating are upgraded, China Bank’s deposit rating could be upgraded.