S&P: Agricultural Bank of China Ltd. Outlook Revised To Stable From Negative; 'A/A-1' Ratings Affirmed
We also affirmed our 'cnAA+' long-term and 'cnA-1' short-term Greater China regional scale ratings on ABC. We also affirmed all the issue ratings on debt that ABC has issued, guaranteed, or supports through letters of credit.
The outlook revision reflects our view that ABC's stand-alone credit profile has improved and provides the bank more buffer to mitigate the negative economic risk trend in China and a potentially weaker capability of the government to provide extraordinary support.
In our view, ABC is likely to maintain its resilient capitalization over the next 12-24 months. We have therefore revised our assessment of the bank's SACP to 'bbb' from 'bbb-'.
"We expect ABC to maintain its risk-adjusted capital (RAC) ratio above our 7% threshold for an adequate capitalization assessment over the next two years," said S&P Global Ratings analyst Liang Yu. "This is despite ongoing pressure on the bank's profitability and loan quality owing to China's slowing economy."
We expect ABC to grow its loan book and asset base by an average 10%–12% each year over 2016-2018 and maintain a fairly stable asset mix. We also anticipate that the bank will substantially slow down its growth in sales of off-balance-sheet wealth management products. In 2015 and the first half of 2016, while the bank grew its loan book by 10% (annualized), it shifted its loan mix toward less risky residential mortgages and away from loans to property developers.
"We expect ABC's profitability, in terms of return on average assets, to weaken over the next two years due to the bank's narrowing net interest margin and higher credit costs. This trend is similar across banks in China," Ms. Yu said.
In our view, ABC's sizable exposure to China's financially weak rural economy constrains its asset quality. County and rural areas account for about one-third of the bank's total loans. In our view, these borrowers are less resilient to an economic slowdown in China.
ABC's nonperforming loans (NPL) ratio for "san nong" (namely farmers, agriculture-related industries, and rural communities) lending was 3% as of June 30, 2016, compared to the bank's average NPL ratio of 2.4%. The bank's sum of NPL and special mention loan (SML) ratios is 6.6% as of June 30, 2016, higher than the industry average. As of June 30, 2016, the industry average NPL ratio is 1.8% and the sum of NPL and SML ratios is 5.8%.
In our view, ABC is likely to maintain its strong business position, given its strong franchise and broad branch network in China. In addition, the bank has an unrivaled franchise in China's county-level banking market, which covers both towns and the vast rural economy. We also expect ABC's solid customer deposit base to continue to support its funding and liquidity.
Considering our 'AA-' sovereign credit rating on China, we could maintain our 'A' issuer credit rating on ABC as long as the bank's SACP stays in the 'bbb' category. A downgrade of the sovereign is unlikely to trigger a downgrade of ABC.
"We continue to view ABC as a bank with a very important role for the government in financing China's economic growth. In our view, the bank also has a very strong link with the government," Ms. Yu said.
We therefore believe there is a very high likelihood that the government would provide timely and sufficient extraordinary support in the event of the bank's financial distress. Accordingly, a potential deterioration in our banking industry country risk assessment on China could weaken the SACP of ABC by one notch. However, it is unlikely to trigger a lowering of our issuer credit rating on the bank.
The stable outlook on ABC reflects our expectation that the bank can maintain a SACP that is stronger than the industry average over the next 12-24 months and continue to have a very high likelihood of government support.
We could downgrade ABC if we lower both our assessment of the bank's SACP and our sovereign rating on China. We could lower the SACP if: (1) we revise our banking industry country risk assessment on China by one category due to heightened economic risk (the economic risk trend is negative); or (2) ABC's capitalization weakens due to severe credit losses or other bank-specific reasons.
An upgrade of ABC is very unlikely over the next two years. We may upgrade the bank if we see a significant improvement in its loan quality and its capitalization strengthens with the RAC ratio staying above 10%.