Dec 20, 2012
Hong Kong, December 17th 2012 – Standard & Poor's Ratings Services said today that it had assigned its 'A' long-term and 'A-1' short-term issuer credit ratings to Agricultural Bank of China Ltd. (ABC). The outlook on the long-term rating is stable. At the same time, we assigned our 'cnAA+/cnA-1' Greater China regional scale ratings to the bank.
"The ratings reflect ABC's 'bbb-' stand-alone credit profile and our view that there is a "very high" likelihood that the government of China would provide timely and sufficient extraordinary support in the event of the bank's financial distress," said Standard & Poor's credit analyst Terry Sham.
We classify ABC as a government-related entity and have incorporated a four-notch uplift to the rating from the stand-alone credit profile (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 government of China (AA-/Stable/A-1+; cnAAA/cnA-1+). The government tends to treat the banking sector as a lever to realize its economic goals.
• "Very strong" link with the government. We believe the government's 82.7% stake in ABC is strategic and long term.
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.
"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," said Mr. Sham. "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 bank SanNong segments (namely farmers, agriculture-related industries and rural community) could complicate its operations.
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.
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. 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.
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.
"The stable outlook on ABC reflects the 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," said Mr. Sham. "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.
Re-disseminated by The Asian Banker