Fitch Ratings has affirmed Agricultural Bank of China Limited's (ABC) Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'A', Short-Term IDR at 'F1+' and Viability Rating (VR) at 'bbb-'.

The Outlook is Stable.

Key Rating Drivers

Government Support-Driven IDR: The Long-Term IDR is driven by our assessment of a 'Very High' likelihood of government support, as indicated by the Government Support Rating (GSR) of 'a', which is one notch below China's sovereign rating (A+/Stable). The state's majority stake in ABC, the bank's long history of receiving state support and its high systemic importance drive our assessment. The Stable Outlook on the bank's IDR mirrors the Stable Outlook on the Chinese sovereign rating.

D-SIB Designation: ABC was designated as a global systemically important bank in 2014 and also as a domestic systemically important bank (D-SIB) in October 2021 by the Chinese authorities, which supports our GSR assessment. It sits in Bucket 4, similar to Industrial and Commercial Bank of China Limited (A/Stable), China Construction Bank Corporation (A/Stable) and Bank of China Limited (A/Stable). It has a strong domestic market position, with loan and deposit market shares of around 9% and 10%, respectively, at end-1H22.

Short-Term IDR Reflects Support: ABC's Short-Term IDR is at the higher of the two options for its Long-Term IDR, reflecting our expectations that sovereign support is more certain in the near term.

Stable OE Despite Weaker Growth: Our stable outlook on China's bank operating environment (OE) score of 'bbb-' reflects our view that regulatory reform, which may be delayed or implemented more slowly due to near-term economic pressure, will ultimately prevent a sustained rise in system leverage. Continued property weakness and Covid-19 pandemic-related disruption, together with rising global uncertainty, are weighing on near-term economic growth prospects. We forecast China's GDP growth at 2.8% in 2022, recovering moderately to 4.5% in 2023.

In spite of this, the policy response has been light and targeted compared with previous downturns and we do not expect a major reversal in regulatory reforms already implemented. We have assigned the OE score above the 'bb' category implied score, as we believe China's robust external finances and record of stable economic performance, as reflected in the sovereign rating, will boost financial market and economic stability. ABC's VR is in line with the implied rating and does not drive its IDRs.

Commanding County Franchise: ABC's significant franchise in county areas and large network provide a low-cost and stable deposit base. However, this is partly offset by the higher operating costs associated with county-area exposure and rural finance. The business profile score of 'bbb' is lower than the 'a' implied category score to account for management and governance issues. These are not uncommon in China, given frequent management rotation and regulatory intervention.

Allowance Coverage Above Peers: We do not expect any major weakening in the bank's asset quality, as further deterioration in property lending should be mitigated by ABC's small direct exposure to property developers, at around 4% of loans at end-1H22. Its above-peer loan-loss allowance coverage ratio, at around 303% at end-3Q22, should limit the risk around its high county business exposure. ABC reported a stable non-performing loan ratio of 1.4% at end-3Q22, which is similar to its reported impaired-loan ratio.

High Costs from County Areas: We expect ABC's profitability to lag that of better-rated state bank peers due to its higher operating costs associated with its county businesses. Its operating profit/risk-weighted asset ratio was 1.7% in 2021, below the state bank average of 1.8%.

Stable Capitalisation: ABC's capitalisation and leverage score of 'bbb-' is higher than the 'bb' implied category score, as we believe the bank will benefit from ordinary capital support from the government. We expect ABC to maintain stable capitalisation, though its common equity Tier 1 (CET1) ratio will likely remain lower than that of higher-rated state bank peers given its weaker profitability and larger growth appetite, including its county area exposure. The CET1 ratio saw a small decrease to 11.1% in 3Q22, from 11.4% at end-2021.

Funding Strength: We expect ABC to maintain its funding strength, which benefits from a large retail deposit franchise and unique county-area franchise. We expect the bank to maintain a stable loan/deposit ratio in 2022 (end-3Q22: reported at 78%), but for there to be a modest increase in 2023, as the bank is likely to continue raising loans to support China's economy recovery.

Rating Sensitivities

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

IDRS and GSR

The Long-Term IDR and GSR will come under pressure if Fitch perceives that the central government's propensity or ability to provide timely extraordinary support to the bank has diminished. Lower propensity may be through an enhanced resolution framework and diminished ability, potentially highlighted by a sovereign rating downgrade. However, we do not expect either scenario to occur in the near term.

The Short-Term IDR will be downgraded if the sovereign's Short-Term IDR is downgraded or if ABC's Long-Term IDR is downgraded.

VR

More extensive use of directed policy lending, resulting in a further meaningful build-up in credit risk without a corresponding increase in loss-absorption buffers, could be negative for the VR. Changes in government policies towards county areas could have a greater impact on ABC's financial and credit profile in light of its heavy focus on this sector.

A sustained deterioration in the bank's financial metrics could also lead to a VR downgrade, including a combination of the following reported core metrics:

The four-year average of reported impaired loans/gross loans worsening to around 3.5% (average of four years to 2021: 1.5%) for a sustained period, although Fitch's assessment of asset quality will also consider other indicators, such as 'special-mention' loans, loan-loss provisioning, and whether and to what extent we believe reported metrics understate any deterioration in asset quality.

The four-year average of operating profit/RWA ratio likely to be sustained below 1.5% (average of four years to 2021: 1.7%).

The CET1 ratio falling to below 10.0% (end-3Q22: 11.1%) without a credible plan to raise it back towards the current level.

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

IDRS and GSR

An upgrade of the sovereign ratings could lead to positive rating action on the GSR and support-driven IDRs, if that were to indicate a greater ability to support the bank with no change in support propensity. There is no upside for the Short-Term IDR, as it is already at the highest level on the scale.

VR

An upgrade of its VR is possible if improvements in asset quality, especially in county areas, prove to be sustainable, or if there is a sustained improvement in the bank's financial metrics, including the likelihood that the CET1 ratio will be maintained above 13.0% for a sustained period.

OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS

We affirmed the ratings on ABC's USD15 billion medium-term note programme at 'A' and 'F1+'. The senior unsecured debt ratings are in line with ABC's IDRs, as they represent the bank's unsecured and unsubordinated obligations.

OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES

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

A downgrade of ABC's IDR would lead to negative rating action on its senior debt and programme ratings.

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

An upgrade of ABC's IDR would lead to positive rating action on its senior debt and programme ratings.

SUBSIDIARIES & AFFILIATES: KEY RATING DRIVERS

We affirmed the Long-Term IDRs on Agricultural Bank of China Limited, Hong Kong Branch; Agricultural Bank of China Limited, New York Branch; and Agricultural Bank of China Limited, Dubai Branch. The branches' ratings are equalised with ABC's IDR, as they refer to the same legal entity.

SUBSIDIARIES AND AFFILIATES: RATING SENSITIVITIES

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

A downgrade of ABC's IDR would lead to negative rating action on ABC's Hong Kong, New York and Dubai branches.

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

An upgrade of ABC's IDR would lead to positive rating action on ABC's Hong Kong, New York and Dubai branches.

VR ADJUSTMENTS

The OE score of 'bbb-' has been assigned above the 'bb' category implied score due to the following adjustment reasons: sovereign rating (positive).

The business profile score of 'bbb' has been assigned below the 'a' category implied score due to the following adjustment reason: management and governance (negative).

The capitalisation and leverage score of 'bbb-' has been assigned above the 'bb' category implied score due to the following adjustment reason: capital flexibility and ordinary support (positive).

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.

Public Ratings with Credit Linkage to other ratings

ABC's IDRs are directly linked to China's sovereign ratings.

The IDRs of ABC's Dubai, Hong Kong and New York branches are directly linked to ABC's IDRs.

ESG Considerations

ABC has an ESG Relevance Score of '4' for Financial Transparency risk. There are structural issues around financial transparency and disclosure, which are not captured in headline performance metrics in China and affect our OE assessment. This negatively affects the bank's credit profile and is relevant to the rating in conjunction with other factors.

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

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