ACRA affirms AAA(RU) to China Construction Bank (Russia) Limited, outlook Stable

The credit rating assigned to China Construction Bank (Russia) Limited (hereinafter, the Bank) is based on the very high probability of external support from its parent company which has a high level of creditworthiness. The Bank’s standalone creditworthiness assessment (SCA) is moderately high due to its strong capital adequacy position, adequate assessments of risk profile and liquidity and funding position, and a satisfactory business profile assessment.

The Bank is a credit organization ranked 140th in terms of assets and 104th in terms of capital among Russian banks. The Bank is wholly owned by China Construction Bank Corporation (hereinafter, CCB, or the SO), which is under the control of the People’s Republic of China (hereinafter, the PRC). CCB is one of the world’s largest banks and its assets exceed USD 3.5 tln.

Key rating assessment factors

Very high probability of extraordinary support from the SO. In ACRA’s opinion, if necessary, CCB can provide the Bank with sufficient long- and short-term financing, as well as provide capital increases. The final assessment of the country risk of the jurisdictions of the foreign SO (the PRC) is equal to Russia’s country risk. The standalone creditworthiness of the SO is assessed by ACRA as strong.

ACRA assesses the level of connection between the Bank and the SO as strong due to the following:

  • Pronounced operational integration between the Bank and the SO (the SO determines corporate procedures and standards of risk management);
  • CCB regularly provides the Bank with guarantees on loans issued to it;
  • CCB is one of the Bank’s main sources of liabilities;
  • The Bank conducts a considerable amount of operations with Chinese companies that do business in Russia and the CIS.

Therefore, the Bank’s credit rating is increased by five notches relative to the SCA.

ACRA notes that the Bank’s business profile has improved to bbb due to the Herfindahl–Hirschman Index decreasing from 0.56 to 0.35. ACRA also takes into account the transparency of the shareholder structure and a well-formed strategy based on realistic economic prerequisites for development. The Bank’s strategy is part of CCB’s overall development strategy for operations in Russia. The Bank provides the conditions necessary for expanding the SO’s client base in Russia, building relationships with contractors, and assessing risks and the market situation, etc. At the same time, a significant part of credit risks arising as a result of CCB’s activities in Russia, and significantly exceeding the amount of risks taken directly by the Bank, are accounted for on the balance sheet of the SO.

ACRA assesses the Bank’s capital position as strong considering the high regulatory capital adequacy ratio (N1.2 stood at 35.9% as of November 1, 2019). The Bank’s capability to generate capital is high. The average capital generation ratio (ACGR) totaled 320 bps. This is mainly due to the Bank’s low expenses on creating provisions and high operating efficiency. NIM (net interest margin) averaged 2.8% for the past three years, while CTI (cost to income) amounted to 40.9%. The Bank does not pay dividends.

The adequate risk profile assessment of the Bank is based on the high quality of the loan portfolio. The majority of assets (around RUB 8.5 bln as of June 30, 2019, or around 30% of the balance sheet) are made up of loans to clients. As of September 30, 2019, the Bank’s loan portfolio itself was made up of loans issued to eight groups of borrowers. Potentially troubled loans are guaranteed by the SO, or companies with a high level of creditworthiness. Counterparties in off-balance sheet liabilities and credit organizations, where the Bank places funds, also boast a high level of creditworthiness. The Bank’s risk management not only manages direct risks that the Bank faces, but also contributes to an objective assessment of these risks by the parent company. The risk management and assessment system has been developed with the participation of CCB and is evaluated by ACRA as adequate.

The strong liquidity position is based on a high volume of liquid and highly liquid assets. The short-term liquidity shortage indicator (STLSI) shows that under the base case scenario, the Bank has nearly RUB 3 bln of excess liquidity, while under the stress scenario the liquidity deficit amounts to 4% of the Bank’s liabilities. The Bank's long-term liquidity shortage indicator (LTLSI) stands at 93%.

ACRA notes the Bank’s high resource base concentration, which limits its funding assessment. Roughly 90% of the Bank’s liabilities are made up of funds of legal entities. Dependence on the largest depositors is also high: the largest client accounts for 30%, while the top 10 clients account for more than 60%, and the funds of the SO account for 10%. ACRA believes that the relationships with creditors/depositors are highly predictable.

Key assumptions

  • CCB will retain its shareholding and operational control;
  • Maintaining the N1.2 ratio above 12% within the 12 to 18-month horizon;
  • Maintaining the current development strategy;
  • Maintaining operating profitability;
  • Maintaining the strong liquidity position.

Potential outlook or rating change factors

The Stable outlook assumes that the rating will most likely stay unchanged within the 12 to 18-month horizon.

A negative rating action may be prompted by:

  • Declining interest of the CCB Group in developing business in the Russian Federation;
  • Substantial deterioration of the financial standing of the SO;
  • Deterioration in the Bank’s capital and liquidity positions;
  • Fast growth in the share of loans in the Bank’s portfolio coupled with simultaneous deterioration in their quality.

Rating components

SCA: a.

Adjustments: none.

Support: SCA + 5 notches.

Issue ratings

No outstanding issues have been rated.

Regulatory disclosure

The credit rating has been assigned to China Construction Bank (Russia) Limited under the national scale for the Russian Federation based on the Methodology for Credit Ratings Assignment to Banks and Bank Groups Under the National Scale for the Russian Federation, the Methodology for Analyzing Relationships Between Rated Entities and Supporting Organizations Registered Outside the Russian Federation, and the Key Concepts Used by the Analytical Credit Rating Agency Within the Scope of Its Rating Activities.

The credit rating assigned to China Construction Bank (Russia) Limited was published by ACRA for the first time on January 25, 2019. The credit rating and its outlook are expected to be revised within one year following the publication date of this press release.

The credit rating was assigned based on the data provided by China Construction Bank (Russia) Limited, information from publicly available sources, as well as ACRA’s own databases. The rating analysis was performed using the consolidated IFRS statements of China Construction Bank (Russia) Limited and the financial statements of China Construction Bank (Russia) Limited drawn up in compliance with Bank of Russia Ordinance No. 4927-U, dated October 8, 2018. The credit rating is solicited, and China Construction Bank (Russia) Limited participated in its assignment.

No material discrepancies between the provided information and the data officially disclosed by China Construction Bank (Russia) Limited in its financial statements have been discovered.

ACRA provided no additional services to China Construction Bank (Russia) Limited. No conflicts of interest were discovered in the course of credit rating assignment.

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