Training on сorporate credit analysis, March 19–20

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

The credit rating assigned to China Construction Bank (Russia) Limited (hereinafter, CCB (Russia) Ltd., or the Bank) is due to 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, strong risk profile assessment, adequate liquidity and funding position, and a satisfactory business profile assessment.

The Bank is a credit institution ranked 141st in terms of assets among Russian banks and 105th in terms of capital. The Bank is wholly owned by China Construction Bank Corporation (hereinafter, CCB, the Supporting Institution, the SI), which is under the control of the People's Republic of China (hereinafter, PRC). The Supporting Institution is one of the world’s largest banks whose assets exceed USD 3 trillion.

Key rating assessment factors

Very high probability of extraordinary support from the Supporting Institution. In ACRA’s opinion, if necessary, the Supporting Institution 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 Supporting Institution (PRC) relative to Russia's country risk are evaluated as moderately strong. The standalone creditworthiness of the Supporting Institution is assessed by ACRA as strong.

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

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

Therefore, the Bank’s SCA is increased by five notches.

ACRA assesses the Bank’s business profile as satisfactory (bbb-) taking into consideration the transparency of the shareholder structure and a well-formed strategy based on realistic economic prerequisites for its development. However, ACRA notes the Bank’s low market positions and the weak diversification of its operating income. The Bank’s strategy is part of the Supporting Institution’s overall development strategy for operations in Russia. The Bank stipulates the expansion of the Supporting Institution’s client base in Russia, the building of relationships with contractors, risk assessment, market situation, etc. At the same time, a significant part of credit risks arising as a result of the Supporting Institution’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 Supporting Institution. The low level of diversification (the Herfindahl–Hirschman Index value amounted to 0.56x at the end of the nine months for 2018) is determined by the fact that the Bank places the majority of its assets in the Bank of Russia. ACRA notes the stability and low risk of such a source of income.    

ACRA assesses the Bank’s capital position as strong considering the high regulatory core capital adequacy ratio (N1.2 stood at 47.5% as of December 1, 2018). The Bank’s capability for capital generation is high. The average capital generation ratio (ACGR) totaled 343 bps between 2014 and the first nine months of 2018, which largely contributes to the Bank’s high operating efficiency. NIM (net interest margin) averaged 7% between 2016 and the first nine months of 2018, while CTI (cost to income) amounted to 35.3%. The Bank does not pay dividends.

Strong risk profile assessment of the Bank is based primarily on a high share of assets placed in the instruments with a low level of credit risk. The majority of assets (over RUB 15 bln as of October 1, 2018, or 75% of the balance sheet) are made up of funds placed in the Bank of Russia.  As of September 30, 2018, the loan portfolio itself was made up of loans issued to the five groups of borrowers. Potentially troubled loans are guaranteed by the SI, or companies with a high level of creditworthiness.  Сounterparties in off-balance sheet liabilities and credit organizations, where the Bank places funds, also boast a high level of creditworthiness. The Agency notes that the bulk of loans granted by the Group to Russian borrowers are accounted for on the balance sheet of CCB. Risk management of the Bank does not only manages direct risks that it 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 СCB and is evaluated by ACRA as adequate.

Strong liquidity position is based on a high volume of liquid and high-liquid assets.  The short-term liquidity shortage indicator (STLSI) calculated by ACRA shows that under the base case scenario the Bank has nearly RUB 10 bln of excessive liquidity, while under the stress scenario the liquidity surplus is 36% of the Bank’s liabilities. The Bank's long-term liquidity shortage indicator (LTLSI) is above 200%.

ACRA points to the Bank’s high resource base concentration, which limits its funding assessment. Roughly 100% of the Bank’s liabilities are made up of funds of legal entities. Dependence on the largest creditors (depositors) is high (the largest client accounts for 41%, the top 10 clients for more than 90%, and the funds of the SI for 23.5%). The Agency believes that the relationships with the creditors (depositors) are marked with a high level of predictability. Additionally, a significant amount of borrowed funds are not used for lending to customers, but placed in the Bank of Russia, which reduces the risk of losing financial stability in case of the withdrawal of funds by the largest creditors (depositors).

Key assumptions

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

Standalone creditworthiness assessment (SCA): a.

Adjustments: none.

Support: 5 notches up to SCA

Issue ratings

No outstanding issues have been rated.

Regulatory disclosure

The credit rating has been assigned under the national scale for the Russian Federation and is 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 Member Company Relationships Within Corporate Groups, and the Key Concepts Used by the Analytical Credit Rating Agency Within the Scope of Its Rating Activities

A credit rating has been assigned to China Construction Bank (Russia) Limited for the first time. The credit rating and its outlook are expected to be revised within one year following the rating action date (January 23, 2019).

Disclosure of deviations from approved methodologies. The risk profile factor was not used to assess the quality of the loan portfolio owing to the fact that its share in the overall asset structure totaled around 15% under Russian Accounting Standards (RAS) as of October 1, 2018, and the amount of actually accepted risk in the portfolio is not critical for financial stability of China Construction Bank (Russia) Limited.

The assigned credit rating is based on 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 IFRS statements of China Construction Bank (Russia) Limited and statements of China Construction Bank (Russia) Limited composed in compliance with the Bank of Russia Ordinance No. 4212-U dated November 24, 2016. The credit rating is solicited, and China Construction Bank (Russia) Limited participated in its assignment

No material discrepancies between provided data and 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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