Fitch Affirms China Banking Corporation at 'BB+'; Outlook Negative

(The following statement was released by the rating agency)
Fitch Ratings-Singapore-12 October 2020:
Fitch Ratings has affirmed the Long-Term Issuer Default Ratings (IDRs) of
China Banking Corporation (CBC) at 'BB+'. The Outlook on the IDRs is Negative,
reflecting continued pressure over its Standalone Credit Profile due to the
coronavirus pandemic.

The Philippines' economy is taking a severe blow from the coronavirus
pandemic, with GDP contracting by 9.0% in 1H20 (2019: 6.0% growth) to mark the
worst deterioration in south-east Asia. Economic conditions have worsened
considerably since our last review in May 2020, and will remain challenging
despite our expectation of a rebound in headline growth to 9.0% growth in 2021
from an 8.0% shrinkage in 2020. The banks' financial results in 1H20 were
propped up by a debt moratorium and aggressive monetary easing by the central
bank, but we believe difficulties lie ahead.

Social distancing measures and prolonged job market weakness - for both
domestic and overseas Filipino workers - are likely to continue to dampen
consumer confidence and curb private consumption in the near term. Extended
movement restrictions in the Philippines have also exerted pressure on
business cash flows, from micro and small entrepreneurs to corporates in
heavily affected sectors like aviation and tourism. The more difficult
operating environment will continue to pressure asset quality and earnings.
Key Rating Drivers
The Long-Term IDRs of CBC are driven by its Standalone Credit Profile, as
indicated in its Viability Rating (VR). The ratings take into consideration
its status as a mid-sized bank in the Philippines, adequate funding and
liquidity profile, capital buffers which are acceptable albeit lower than
average, and longstanding ties with the Chinese Filipino business community
which has helped to support its loan quality. These factors are
counterbalanced by the risks associated with its high large-borrower
concentration and rapid loan growth in recent years, as well as the
challenging operating environment.

Fitch has maintained our negative outlook on the bank's asset quality
mid-point score of 'bb+', due to weakness in the operating environment which
is creating significant pressure on asset quality. CBC's gross non-performing
loan ratio of 1.6% at June 2020 was better than the system average of 2.6%,
and was only marginally worse than its end-2019 ratio of 1.5%, although this
was helped by the debt moratorium which has been extended to December 2020.

Against this backdrop, we believe that asset quality will only deteriorate
more significantly from 1Q21, though the bank's steady underwriting standards
should partially mitigate the default risks. We believe that its asset quality
and tolerance for risks will continue to have a higher influence on its
overall standalone credit profile.

We have retained the bank's earnings and profitability score at 'bb'. Return
on assets had remained stable in 1H20 at 1.1% (2019: 1.1%), as the steep
decline in funding costs and large trading gains amid the significantly
lower-interest environment have helped to more than offset the spike in
provisioning cost. Nevertheless, we believe that these revenue tailwinds have
largely been recognised, and the risks to the bank's profitability remain
tilted to the downside in the near term as asset yields are likely to decline
further while provisioning expense is projected to remain high. This underpins
our negative outlook on the earnings and profitability mid-point score.

CBC's common equity Tier 1 ratio remained stable at 12.8% as of June 2020
(end-2019: 12.8%). These loss-absorption buffers remain lower than the
industry average, and drives the bank's capitalisation and leverage midpoint
score of 'bb'. We expect its capital ratio to remain steady in the near term,
on account of sustained profitability and slower balance-sheet growth. We
expect the ratio to gradually decline once growth momentum resumes and
economic conditions normalise, but we believe that the bank will continue to
sustain acceptable buffers as it grows, with its steady risk appetite keeping
asset risks in check.

Funding and liquidity is the bank's rating strength, as indicated by its
funding and liquidity mid-point score of 'bbb-'. CBC's gross loan-to-deposits
ratio of 77% at June 2020 was lower than its peers' average, while the
liquidity coverage ratio (LCR) of 121% in 2Q20 reflects a satisfactory
liquidity position. The bank also has limited reliance on wholesale funding
sources, with CASA making up about 53% of its deposits. We believe that its
funding and liquidity profile will remain largely stable in the near term,
supported by continued central bank actions and weak credit demand.

SUPPORT RATING AND SUPPORT RATING FLOOR

CBC's Support Rating of '3' and Support Rating Floor (SRF) of 'BB' reflect our
expectation that there is a moderate likelihood of extraordinary sovereign
support to the bank, in times of need. This takes into consideration its
moderate systemic importance, with an approximately 5% market share of system
assets, and the Philippines sovereign fiscal flexibility - as indicated by its
'BBB'/Stable rating.
RATING SENSITIVITIES
IDRS, VR

Factors that could, individually or collectively, lead to negative rating
action/downgrade:

We may downgrade the bank's IDRs and VR if weak economic conditions are
prolonged and result in asset quality and profitability metrics declining to
levels that exceed our base scenario: that is, if the NPL ratio rises to - and
stays above - 3% over a prolonged period and/or if its operating
profit/risk-weighted assets (RWA) does not recover to its pre-pandemic levels.
Severe stress in the real-estate market would also have significant
repercussions on the bank's asset quality and earnings, given its portfolio
concentration in the sector (23% of loans) - which also has a significant
positive correlation with the broader economy. Any downgrade in the IDR,
however, would be limited to one notch, given the bank's SRF of 'BB', unless
our assessment of the sovereign support also weakens.

Factors that could, individually or collectively, lead to positive rating
action/upgrade:

An economic recovery that is faster or in line with our base-case projection,
resulting in lower asset impairment and better-than-expected earnings, may
lead us to revise the Outlook on the IDR back to Stable.

SUPPORT AND SUPPORT RATING FLOOR

Factors that could, individually or collectively, lead to negative rating
action/downgrade:

CBC's Support Rating and SRF are sensitive to our assessment of the state's
ability and propensity to support the bank. A downgrade of the sovereign
rating may lead us to also downgrade its Support Rating, unless the government
extends more explicit statements of support to the bank or demonstrates a
record of providing support to banks of similar systemic importance.

Factors that could, individually or collectively, lead to positive rating
action/upgrade:

Conversely, an upgrade in the sovereign rating may lead us to take similar
positive rating action on the Support Ratings.
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond
issuers have a best-case rating upgrade scenario (defined as the 99th
percentile of rating transitions, measured in a positive direction) of three
notches over a three-year rating horizon; and a worst-case rating downgrade
scenario (defined as the 99th percentile of rating transitions, measured in a
negative direction) of four notches over three years. The complete span of
best- and worst-case scenario credit ratings for all rating categories ranges
from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on
historical performance. For more information about the methodology used to
determine sector-specific best- and worst-case scenario credit ratings, visit
[https://www.fitchratings.com/site/re/10111579]
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING The
principal sources of information used in the analysis are described in the
Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit
relevance is a score of '3'. This means ESG issues are credit-neutral or have
only a minimal credit impact on the entity, either due to their nature or the
way in which they are being managed by the entity. For more information on
Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
China Banking Corporation; Long Term Issuer Default Rating; Affirmed; BB+;
Rating Outlook Negative
; Local Currency Long Term Issuer Default Rating; Affirmed; BB+; Rating
Outlook Negative
; Viability Rating; Affirmed; bb+
; Support Rating; Affirmed; 3
; Support Rating Floor; Affirmed; BB

Contacts:
Primary Rating Analyst
Tamma Febrian,
Associate Director
+65 6796 7237
Fitch Ratings Singapore Pte Ltd.
One Raffles Quay #22-11, South Tower
Singapore 048583

Secondary Rating Analyst
Willie Tanoto,
Director
+65 6796 7219

Committee Chairperson
Grace Wu,
Senior Director
+852 2263 9919

Media Relations: Leslie Tan, Singapore, Tel: +65 6796 7234, Email:
leslie.tan@thefitchgroup.com
Peter Hoflich, Singapore, Tel: +65 6796 7229, Email:
peter.hoflich@thefitchgroup.com

Additional information is available on www.fitchratings.com

Applicable Criteria
Bank Rating Criteria (pub. 28 Feb 2020) (including rating assumption
sensitivity) (https://www.fitchratings.com/site/re/10110041)

Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
(https://www.fitchratings.com/site/dodd-frank-disclosure/10138600)
Solicitation Status
(https://www.fitchratings.com/site/pr/10138600#solicitation)
Endorsement Status
(https://www.fitchratings.com/site/pr/10138600#endorsement_status)
Endorsement Policy
(https://www.fitchratings.com/site/pr/10138600#endorsement-policy)

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