August 28, 2017 / 2:48 AM / a year ago

Fitch Publishes Postal Savings Bank of China's 'A+' Rating; Outlook Stable

(The following statement was released by the rating agency) HONG KONG/SHANGHAI, August 27 (Fitch) Fitch Ratings has published Postal Savings Bank of China Co Ltd.'s (PSBC) Long-Term Issuer Default Rating (IDR) of 'A+' and Short-Term IDR of 'F1+'. The Outlook is Stable. Fitch has also published the bank's Support Rating (SR) of '1', Support Rating Floor (SRF) of 'A+', and Viability Rating (VR) of 'bb+'. KEY RATING DRIVERS IDRS, SUPPORT RATING, SUPPORT RATING FLOOR The bank's IDRs are at its SRF; the IDRs' strong linkage to China's sovereign rating (A+/Stable/F1+) reflects the extremely high probability of the central government supporting the bank in a timely manner in the event of stress. PSBC was established in 2007 as a commercial bank in China, but it effectively performs several policy-related functions and operates a unique business model through the use of direct outlets and agency outlets under China Post Group (CPG), a state conglomerate solely owned by the Ministry of Finance. The agency outlets managed under CPG are approved by the State Council and the China Banking Regulatory Commission (CBRC). Regulatory oversight of PSBC is conducted by the same department within the CBRC that regulates policy institutions. The bank is currently 68.92% owned by CPG, with the rest of the bank owned by the public after it was listed in Hong Kong in 2016 to gain access to market funding. However, CPG and the finance ministry have injected capital into PSBC over the past decade to support the bank's growth. Fitch expects CPG to maintain its majority-stake in and control over PSBC. PSBC's commercial operations are compromised by its policy focus on serving China's rural population through a network of over 39,900 outlets, the largest among Chinese banks. Many of PSBC's outlets are in the same premises as postal enterprises under CPG. The bank's customer base, at over 520 million customers, covers nearly a third of China's population. Many of the customers live in deep rural areas and would otherwise not have access to the basic financial services that the bank provides. PSBC's retail deposit base also makes it a significant net provider of liquidity in China's interbank market. PSBC plays a key role in the provision of financial services to microfinance and rural customers to support China's stimulus and urbanisation efforts to counteract domestic and external pressures. CPG has a government-protected monopoly and is responsible for the provision of nationwide postal services, as stipulated in the China Postal Law. PSBC accounted for around 98% of CPG's profits in 2016, and effectively subsidises the cost of postal services. The high integration between PSBC and its agency outlets under CPG underpins the bank's very high systemic importance, especially in rural areas. Fitch believes PSBC plays a larger policy role than other state banks. PSBC is the sixth-largest commercial bank in terms of assets and fourth-largest in terms of retail deposits, and its rural presence extends far deeper into the sub-county regions than the Agricultural Bank of China Limited (A/Stable). VIABILITY RATING PSBC's VR of 'bb+' balances its relatively lower risk appetite and stronger asset quality against its lower profitability and capitalisation compared with the state-owned commercial banks in China. PSBC's profitability and capitalisation tend to be lower because of the high operational cost of its business model, which includes paying agency fees to its parent. PSBC also benefits from a strong funding and liquidity profile, thanks to its extensive network (including agency outlets) and niche retail focus. PSBC had a loan-to-deposit ratio of only 41% at end-2016, with 85% of its deposits and 53% of loans from retail customers, a large portion who are from rural areas. While PSBC aims to increase its loan-to-deposit ratio to around 50% over the next two to three years, Fitch believes the majority of PSBC's new loans will still come from retail customers. Fitch believes PSBC's lower credit exposure (both loan and non-loan) translates into better reported asset quality relative to other state banks. PSBC's NPL and "special-mention" loans made up 1.7% of total loans at the end of 2016, below the state bank average of 5.3%. PSBC has a Fitch Core Capital ratio of 8.3%, below the 11.5% average for state banks, as its ROA of 0.5% is much lower than the state bank average of 1.1% due to its relatively low risk appetite and high operating cost leverage, which translate into lower profitability and internal capital generation. Fitch expects PSBC's capitalisation to continue to lag that of state peers, but believes this is mitigated by its lower overall risk profile and high expectations of ordinary support from the state due to its ownership and policy-related roles. RATING SENSITIVITIES IDRS, SUPPORT RATING, SUPPORT RATING FLOOR In Fitch's view, the state has a higher propensity to extend extraordinary state support to PSBC due to the bank's large policy role, both as a rural financial services provider and as a key subsidiary under CPG, compared with other state banks. However, there are differences between PSBC and China's pure policy banks in terms of ownership structure and services provided. A downgrade of the sovereign rating may result in a negative rating action to PSBC, but an upgrade of the sovereign rating may not lead to a similar rating action to the bank. Changes to the bank's ratings would be closely correlated with changes in China's sovereign rating, which was affirmed at 'A+' on 13 July 2017. Negative rating action could be taken should there be any weakening in the perceived ability or willingness of the state to support the bank, including relative to similarly rated institutions in China. This could arise from, for example, a significant fall in government ownership that results in meaningfully less policy influence, or changes in the support mechanism that affects the bank's relationship with CPG or with the state. VIABILITY RATING The bank's VRs are sensitive to a change in Fitch's assumptions regarding PSBC's asset quality. We estimate PSBC has around 16% of assets in entrusted investments (versus around 1% for state banks and 19% for mid-tier banks), which are the bank's investments in asset or wealth management products managed by other financial institutions. Fitch believes most of PSBC's entrusted investments are not credit-related in nature (i.e. potentially high risk), but an increase in PSBC's risk appetite could have a direct impact on its asset quality, and in turn lead to a downgrade in the bank's VR. Like other state banks in China, an upgrade of its VR is possible if Fitch considers the operating environment to be less of a rating constraint than it has in the past. This would likely be evident from greater certainty over regulators' commitment to prioritise containing financial risks over growth, credit growth being more sustainable, off-balance-sheet activities reducing or being less of a concern (including due to greater transparency around such activities), greater confidence that reported asset-quality ratios will hold, or the banks having improved capitalisation or strengthened profitability. That said, PSBC's business model will continue to act as a drag on its financial profile. Contact: Primary Analyst Grace Wu Senior Director +852 2263 9919 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central, Hong Kong Secondary Analyst Jaclyn Wang Associate Director +86 21 5097 3189 Committee Chairperson Ambreesh Srivastava Senior Director +65 6796 7218 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: Additional information is available on Applicable Criteria Global Bank Rating Criteria (pub. 25 Nov 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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